We’ve seen some sizeable pharmaceutical deals over the past few years: Glaxo and SmithKline in 2000, Pfizer and Wyeth in 2009, plus Bayer and Monsanto in 2016, but this morning’s announcement that Shire has formally agreed to consider a preliminary approach from Takeda is up there with the largest deals, only dwarfed by an all-US deal in 1999 between Pfizer and Warner Lambert.
It has taken a lot of back and forth but late last night Shire management succumbed to Japanese owned Takeda Pharmaceuticals entreaties to consider a deal, and the price for that appears to be £49 a share, still a significant premium to the share price as it is now.
The deal would also give Shire shareholders a 50% stake in Takeda which admittedly isn’t anywhere near as much as it used to be a few weeks ago. Since it became known that Takeda was looking at Shire for the initial price of £44 a share the shares have nosedived in Tokyo, down 30% since the beginning of the year, with 17% of that decline coming in the wake of Takeda’s interest in Shire becoming public, at the end of March.
Given how low interest rates are in Japan right now raising the necessary funds for this Shire acquisition shouldn’t be too difficult, however just because you can raise the money doesn’t mean you should.
According to the most recent accounts Takeda has net debt of 884bn yen, which comes in at about $8.1bn, a significant increase on where it was in 2016, when it was less than half that amount.
When you add in Shire’s debt which comes in at $20bn and also add in the extra capital which needs to be raised from Japanese banks to fund the purchase and Takeda’s debt will explode well above the $40bn level.
At the moment this remains a preliminary offer however shareholders in Shire are likely to be a little concerned about getting a 50% stake in a company which has seen its share price nosedive in the last few months and which could well be worth considerably less by the time any deal is concluded.
With the best will in the world, irrespective of how good Shire’s product pipeline is, it is hard to make the case that there is the amount of value in this deal that the additional debt would justify, at a time when pharmaceutical margins are likely to come under further pressure.
This would be especially true if the recent joint venture by Amazon and Warren Buffet’s Berkshire Hathaway is successful in driving down health care costs across the industry in the coming years. It is true that having a diverse drugs portfolio is important but control of costs is likely to be equally so in the coming years.
Maybe that’s why Allergan turned their nose up last week when faced with the prospect of a bidding war, and why Moodys ratings agency have said that Shire could face a multi notch downgrade.
Both companies have until 8 May to do their due diligence on each other and while the £49 headline number is an attractive one for Shire shareholders, it only represents 50% of what they will get as the other 50% would be in the form of Takeda shares, which may force some UK shareholders into a forced sale despite the offer of an ADR.
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