Pfizer Takes Another Little Blue Takeover PillOn 4/28/14, Pfizer Inc. (NYSE-PFE) confirmed prior discussions with AstraZeneca PLC (XLON-AZN & NYSE–AZN) and a continuing interest in a possible combination via a merger transaction. Separately, AZN confirmed that the PFE Chairman contacted its Chairman (on 4/26/14) to have a discussion, their first communication since the initial approach in January 2014. PFE wanted to issue a joint statement on 4/28/14 publicly disclosing that the companies were involved in discussions. However, the AZN Board determined that it was not appropriate to engage in discussions absent a “specific and attractive” proposal. The companies previously met on 1/5/14; AZN disclosed PFE made a “preliminary and conditional” proposal consisting of 1.758 PFE shares and £13.98 cash per AZN share (£46.61 value based on a $30.52 PFE close price on 1/3/14). AZN concerns included the large proportion of stock consideration and the proposed tax inversion deal structure (from redomiciling the combined entity in the UK). In addition, AZN felt the proposal “very significantly undervalued” the company and its future prospects, specifically its diabetes franchise and oncology pipeline. The proposal was rejected by AZN on 1/12/14; a few days later, PFE notified the company that it was no longer actively pursuing a transaction.
While AZN has verbalized “no, no, no”, its body language is saying “yes, yes, yes” (to the right price premium and deal terms). PFE is now in a 30 calendar day period before it is required to give a firm intention; otherwise, any future proposal would be frozen in a six month penalty box (except if both the Takeover Panel and AZN agree to extend). The company is speaking with AZN shareholders in the interim; there is institutional ownership overlap to which the deal synergies and lower tax rate should appeal. PFE was reported this morning to be preparing a sweetened bid which may be announced next week; we believe a takeover value in the low-mid £50s should ultimately carry the day. The proposal is subject to three conditions – customary due diligence, the unanimous recommendation of the AZN Board and AZN directors giving irrevocable undertakings to accept any offer – all of which may be waived in whole or part. PFE has an option to adjust the proposal based on a higher-than-projected AZN dividend payment for 1H14 and any “whitewash transaction” prior to a signing a deal. Last, the apparent urgency of PFE may be the recently announced specialty pharmaceutical mergers and any potential expedited crackdown by the U.S. government and/or tax authorities on overseas domicile relocations that take advantage of lower tax rates in certain foreign jurisdictions.
Though short of aggressive expectations of a £60/share takeover value, we feel the potential high-£30s downside price on no deal is something the AZN Board will have to very seriously consider if PFE proposes a deal with a low-mid £50s value. A £46.61 AZN deal value (1/5/14 proposal) is a 23% premium to the unaffected £37.82 AZN close price on 4/17/14 and a 21% premium to the £46.61 AZN prior 20 day average closing price. The initial light price premium is likely the basis to begin discussions rather than an ultimatum; we note that PFE has not disclosed a synergy estimate. Using the initial proposal and assuming $3.75B-$4.5B synergies (~5%-6% of 2014E combined revenues), 4.5% deal debt interest rate (~$30B debt) and a 20% tax rate, we estimate New PFE 2014E P/F $2.42-$2.49 EPS (~8%-11% accretive to standalone PFE $2.24 EPS). Based on PFE’s pre-deal 14x P/E multiple, New PFE would trade in the $34-$35 range. The implied £50/share deal value (1.69 USD/GBP exchange) is a ~32% price premium to the unaffected price. The AZN valuation multiples at £50/share are 13.9x EV/EBITDA (£4.68B, 31% margin) and 20.5x P/E (£2.46 EPS). At $35/share, New PFE would trade at a 10.5x EV/EBITDA multiple ($35.9B EBITDA, 48% margin); PFE pre-deal traded at an 8.6x EBITDA valuation multiple.
AZN has indicated that a larger cash percentage will be required from any further PFE proposals. The 70/30 stock/cash consideration does not seem to be set in stone but rather appears to be a starting point for negotiations. A 50/50 stock/cash deal structure (£26/share cash and 1.4 PFE shares) at a $31.50 PFE price implies a ~£52 AZN value (37% premium to the unaffected price). We note AZN holders are required to receive a minimum of 20% New PFE S/O for the change of domicile, which equates to a minimum ratio of ~1.27 PFE shares (per AZN share). A $35/share New PFE post-deal trading price under this cash/stock scenario implies a ~£55/share value (45% price premium). Assuming $50B deal debt (5.5% interest rate), a $6.5B drawdown of the combined cash and short term investments, and $3.75B-$4.5B of synergies, we estimate New PFE would have 2014E P/F $2.41-$2.49 EPS (8%-11% accretion). The combined entity would have ~3.0x debt/EBITDA leverage (including synergies) and 2.1x leverage including P/F $31B cash and short term investments; PFE should be able to retain an investment grade rating under this scenario.
AZN has weak near-to-mid term growth prospects; negotiating its share of the merger benefits may be more productive than having its Chairman defend the current business strategy and warn of potential social and corporate culture issues. Assuming a $50B valuation for deal synergies ($32M) and lower taxes ($18M), a 50% allocation would be worth ~£12/share. The implied £50/share deal price should be a good starting point for serious negotiations. Given the positive investor reception, the strategic product overlap and the continued consolidation of specialty pharma companies, we expect PFE to make a firm proposal for AZN. In addition, we view AZN’s response as a strong hint to bump the proposed price in order to commence negotiations. While accusations may fly about the poor track record of realizing consolidation benefits the pharmaceutical industry, we expect AZN shareholders will eventually succeed in getting their Board to succumb to a princely deal sum.
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*LANDSDOWNE FELL 6% IN APRIL, MAVERICK DROPPED 3%, CNBC SAYS
*THIRD POINT LOST 1.4%, CNBC SAYS
Telefonica sweetens offer to win EU approval for E-Plus deal
May 1 (Reuters) - Telefonica Deutschland has sweetened its offer of concessions in order to win European Union approval for its planned takeover of KPN's E-Plus unit in Germany, a spokesman for the German telecoms provider said on Thursday.
"As is usual in such processes, we have now filed a modified remedy package with the European Commission, which is based on the first market test. We cannot comment on any details of the remedies," spokesman Albert Fetsch said.
The EU antitrust authority is now seeking feedback from third parties and has given them until May 5 to do so, a person familiar with the matter said.
Telefonica Deutschland, a unit of Spanish telecoms operator Telefonica, last month offered to lease spectrum and access to its network to rivals after the EU antitrust authority expressed concerns about the 8.6 billion euro ($11.9 billion) deal.
Sources told Reuters the first package was not sufficient to create a fourth mobile operator in Germany to allay regulatory concerns that the deal would reduce the number of operators in Europe's biggest market.
*PFIZER SAID TO PLAN RAISING ASTRAZENECA BID ABOVE $106 BILLION
*PFIZER SAID TO WEIGH NEW ASTRAZENECA OFFER ABOVE 50PNDS/SHARE
Mylan Laboratories Inc Exec: Continue to look at several different assets, exploring various M&A opportunities - conf call comments
Shire's Appeal Doesn't Rest on Takeover Attention
Every U.S. pharmaceuticals company seems keen to run away and join the traveling circus. It is hard to believe one isn't eyeing Shire SHP.LN +1.75% for its trapeze.
American health-care companies are venturing overseas to pull off a so-called inversion, whereby they acquire a foreign company and restructure themselves to reduce their tax rate. Shire, the U.K.-listed specialty pharma firm, looks a natural target. Allergan, AGN +2.39% the maker of Botox which is fighting a hostile takeover from Valeant Pharmaceuticals International, VRX.T +2.03% has been named as one potential buyer.
Bid speculation is nice. Shire's business looks more than capable of a good solo performance, though.
The appeal for U.S. suitors of flipping into a lower-tax jurisdiction is clear. And with its 19% tax rate and a market value of about £20 billion ($33.74 billion), Ireland-domiciled Shire is attracting attention in a market with few sizable targets. Pfizer's PFE -0.43% $100 billion approach to buy AstraZeneca AZN.LN +0.45% has braved fears of a U.S. political backlash.
Shire, whose stock rose nearly 50% last year, is doing well in driving the price up for any would-be buyer. The company said Thursday it now expects earnings per share to grow in the "mid to high twenty percent range" this year. Research and development spending could fall as much as 11% thanks to the conclusion of late-stage clinical trials, estimates Barclays. BARC.LN +1.59% And Shire's drugs treating attention deficit hyperactivity disorder, seen as off-putting to some buyers, did well: First-quarter sales of Vyvanse, Shire's biggest seller, rose by 18%, helped by price increases.
Chief Executive Fleming Ornskov is proving adept at managing worries about Shire's longer-term growth. Concerns persist about potential generic competition for Lialda, a bowel drug. But Mr. Ornskov wants to double Shire's neuroscience sales by the end of the decade, helped by a long-acting adult ADHD treatment that could be launched as soon as next year.
Meanwhile, even after last year's $4.2 billion purchase of ViroPharma, there is plenty of scope to boost Shire's growth and pipeline with more deals. The company could throw off annual free cash flow of $2 billion a year from 2015, according to Citigroup. C +0.04%
Shire, buoyed by takeover talk, is trading at about 16.5 times forecast 2015 earnings, roughly a 10% premium to the slower-growing European pharma sector. It deserves that advantage, whether or not the clowns come to town.
Facebook Runs Into a Rift Over the Oculus Rift
ZeniMax Says Employee Who Left to Join Oculus Took Virtual-Reality Tech With Him
ZeniMax is claiming rights to the intellectual property that powers the Oculus Rift virtual-reality headset. AFP/Getty Images
In March, Facebook Inc. FB +3.53% agreed to pay $2 billion to buy virtual-reality startup Oculus VR, hankering to gain technology it hopes will transform the way people interact online.
Now, with the deal yet to close, another company is laying claim to an important part of Oculus's technology.
ZeniMax Media Inc., a Maryland-based maker of videogames, is claiming rights to the intellectual property that powers the Oculus Rift virtual-reality headset, which can be used to play videogames, watch movies or double as a computer monitor.
In recent weeks, lawyers for ZeniMax have sent two letters each to Oculus and Facebook, saying former ZeniMax employee John Carmack, who joined Oculus last August, improperly took ZeniMax's intellectual property with him to Oculus, according to documents reviewed by The Wall Street Journal. That technology, the company claims, propelled Oculus from a shoestring startup to technology's big leagues in less than two years.
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John Carmack ZUMAPRESS.com
A spokesman for Oculus said: "It's unfortunate, but when there's this type of transaction, people come out of the woodwork with ridiculous and absurd claims. We intend to vigorously defend Oculus and its investors to the fullest extent." Oculus declined to make Mr. Carmack available for comment and efforts to reach him weren't successful.
Mr. Carmack is known in the programming world as the force behind blockbuster games including "Doom" and "Wolfenstein 3D," early entries in the wave of shooting games.
The letters from ZeniMax's lawyers came after Facebook struck its deal to acquire Oculus, part of the company's efforts to leap from a social-media platform to a major player in the race with Google Inc., GOOGL +0.19% Apple Inc. AAPL +0.72% and Amazon.com Inc. AMZN +1.14% to be at the forefront of Internet use.
Facebook's purchase of Oculus is an example of the style of acquisition favored by CEO Mark Zuckerberg, who controls Facebook through supervoting shares. He has carried out his vision partly through casual advances to fellow entrepreneurs, as opposed to the more structured and heavily advised negotiations typical of much of the corporate world.
Facebook's three biggest deals, Oculus, the mobile messenger WhatsApp and the photo-sharing app company Instagram, were all finalized in under two weeks. More typically, deal negotiations take months. One of Facebook's past mottos was "Move fast and break things."
A Facebook spokesman said that in those deals, the informal courtship period began months or years earlier.
It is unclear whether Facebook knew before its deal to acquire Oculus that ZeniMax was seeking compensation for the intellectual property behind the headset.
ZeniMax is partly owned by private-equity firm Providence Equity Partners LLC. Its board includes CBS Corp. Chief Executive Leslie Moonves, director Jerry Bruckheimer and former Metro-Goldwyn-Mayer Studios Inc. CEO Harry Sloan.
The company is best known for popular fantasy games, such as "The Elder Scrolls" series, which was published by a subsidiary, Bethesda Softworks. Providence invested $300 million in ZeniMax in 2007 and an additional $150 million in 2010, and it now owns a minority stake, according to people familiar with the matter.
In a statement, ZeniMax said it "sent formal notice of its legal rights." It added: "ZeniMax believes it is necessary to address these matters now and will take the necessary action to protect its interests." It is seeking compensation, according to people close to the company.
The dispute traces its roots to early 2012, when Mr. Carmack, then a ZeniMax programmer, contacted Palmer Luckey, according to a person familiar with the matter. Mr. Luckey was then working with a research group at the University of Southern California, experimenting with virtual-reality headsets.
Mr. Luckey sent a prototype headset to Mr. Carmack, according to the person. Oculus declined to make Mr. Luckey available for comment.
That June, Mr. Carmack demonstrated a modified headset at ZeniMax's booth at a Los Angeles gaming convention. Interviews at the conference, taped and later posted on YouTube, show a pair of ski goggles jury-rigged with duct tape, a contraption that ZeniMax now says was the template for Oculus's Rift headset. Mr. Carmack says in one video that he introduced new software to transform the headset into a workable product.
Mr. Luckey founded Oculus around that time. The company grew quickly, even by Silicon Valley standards.
In August 2012, ZeniMax began seeking compensation for the intellectual property, according to people familiar with the discussions. Negotiations continued on and off for nearly six months, with Oculus eventually offering ZeniMax a small equity stake, but no deal was reached, the people said. This past summer, Mr. Carmack joined Oculus, and earlier this year, five ZeniMax employees joined Oculus, the people said.
In February, ZeniMax asked Mr. Carmack to disclose all of the virtual-reality inventions he developed while working at ZeniMax, one of the people said.
On March 25, Mr. Zuckerberg announced Facebook's deal to buy Oculus.
On April 18, ZeniMax wrote to Oculus's lawyers and Facebook's general counsel, Colin Stretch : "It was only through the concerted efforts of Mr. Carmack, using technology developed over many years at, and owned by, ZeniMax, that Mr. Luckey was able to transform his garage-based pipe dream into a working reality," according to the letter reviewed by the Journal.