Shire has announced an all-stock approach for Baxalta. The proposed offer is for 0.1687 Shire ADRs per Baxalta share ($45.23 per Baxalta share at Shire's 3 August price). The Baxalta board has rejected the approach, stating it added nothing to the private offer made on 10 July. In this note we present a merger model and combined PharmaValues NPV analysis for Shire-Baxalta. We conclude:
■ CS merger model suggests 1% accretion in 2017e, increasing to 12% in 2019E. This assumes 5% sales synergies in overlapping franchises and 2.5% cost savings of the total combined cost base.
■ Operational synergies drive c.30% of accretion, split 60% between cost savings, revenue synergies and 40% tax. Shire has stated the combined group can achieve a tax rate of 17% vs our Baxalta 24% estimate in 2019E.
■ Buyback drives c.70% of accretion – could be achieved without deal. Shire needs to offer all stock to retain the tax-free nature of Baxalta's spin out from Baxter. Shire is committed to buy back 118m Shire shares to offset
dilution. We estimate a standalone buyback would be 9% accretive in 2019.
■ Shire could offer $53.40 to be EPS neutral in 2018E, +4% in 2019E based on our modelling and assumptions.
■ CS Special Situations team note that Baxalta's corporate defenses make a deal very unlikely before 2017 if the offer remains hostile.
■ Valuation: Shire trades on a 2016 PE of 19.8 a 6% discount to EU Specialty Pharma peers, but on a par with the CEO's preferred large US Biotech peer group. Shire trades on 1.83x PharmaValues NPV, vs. 1.32 average for EU
Specialty Pharma peers.