MergerMarket
* Consumer health divest rationale gaining traction
* Smaller acquisitions seen more likely than another mega deal
Pfizer [NYSE:PFE] is faced with several options after calling off its tie-up with Allergan [NYSE:AGN], but how it proceeds will likely be guided by factors including the US elections and market conditions, a source familiar with the situation said.
One alternative gaining traction to a proposed two-way split is for Pfizer to sell its consumer healthcare unit, several sector advisors said. This potential move could bring in USD 15bn, an analyst following the company suggested.
A Pfizer spokesperson referred this news service to the company's press release announcing the termination of the Allergan deal.
Pfizer shares rose about 3% Tuesday on expectations the Allergan deal would fail following the US Treasury’s release of new proposals to tackle tax inversion deals. In the statement on Wednesday confirming the deal would lapse, Pfizer said it would make a decision on a split of itself by year end.
The source familiar said that while the parties knew there was a possibility that Treasury could change rules further, no one expected it would be that “aggressive of an interpretation.” In particular, a rule that would lower Allergan’s value for tax inversion calculations presented greater deal risk. Even if it were possible to challenge the proposals, this could not be done before the required deal closing date, he said.
The share price increase indicates investors are more positive on Pfizer’s prospects ex-Allergan and prepared to give it time to rework its corporate strategy. The company had indicated it could separate its Innovative Products and Established Products divisions following an Allergan deal.
The Allergan deal failing does not change the probability of Pfizer being split, the source familiar said. A lot will depend on market conditions between now and year end, he said.
Baxalta’s [NYSE:BXLT] takeover approach from Shire [LON:SHP] so soon after being spun out of Baxter International [NYSE:BAX] could give shareholders hope that one of the divisions could become a target if Pfizer decides to split, one sector advisor said.
If market conditions are not conducive for a split, Pfizer has the option of divesting its consumer healthcare unit, the sector advisors said.
They questioned why the company would keep hold of a division with annual sales of about USD 3.5bn in the face of a number of much larger competitors.
The unit could attract a valuation of about 4x revenue, the analyst said. This is in line with market reports this year that GlaxoSmithKline’s [LON:GSK] consumer health joint venture with Novartis [VTX:NOVN] could be valued at least at 4x.
A sale of the consumer healthcare division would draw interest from large players in the space, such as Reckitt Benckiser [LON:RB], Bayer [ETR:BAYN], Johnson & Johnson [NYSE:JNJ] and Sanofi [EPA:SAN], according to the sector advisors. Reckitt CEO Rakesh Kapoor expressed interest in the division in 2015.
However, the unit’s growth potential and synergies with other parts of the Pfizer business could stay the company’s hand on consumer health, the source familiar and a second source familiar with the situation said. The second source familiar conceded that the unit is smaller than similar businesses owned by competitors.
Pfizer has operated on the basis of three internal units since 2013 comprising global established products, innovative pharma and vaccines, oncology and consumer healthcare. If Pfizer proceeds with a split, the consumer healthcare unit would be included in its new Innovative Products arm with vaccines and oncology.
While the consumer healthcare business could be evaluated on its own, it is a good business and not separated within its existing division, the first source familiar said.
For Pfizer to turn its attention to another mega deal would be a more difficult prospect to see, the sector advisors said. Any acquisitions in the meantime are likely to be in the small-to-medium space to bulk certain divisions up prior to a two-way split.