A large foreign deal can still make sense
PFE's shareholder-friendly management team has previously stated that the company is open to acquisitions of various shapes and sizes. Regardless of whether PFE decides to split the company into pieces at some point, we believe that the company has a sense of urgency to create value by leveraging the power of its balance sheet to do needle-moving deals. As evidenced by PFE's interest in AstraZeneca last year, one important goal for PFE has been to seek a deal that would maximize access to its balance sheet and improve its tax structure. Since media reports in the past have pointed to the potential for a PFE/GSK combination, we are revisiting that theme and presenting a pro forma analysis of this potential combo. In short, this potential combination could be materially accretive to EPS and DCF, while allowing PFE to unlock access to its balance sheet and improve its tax situation over time. Reiterate Buy.
At ~34% premium, NewCo DCF value would be $44 (vs. our $41 PT)
We conducted a preliminary pro forma analysis using our published model for PFE (Buy, $41) and our colleagues’ model for GSK (Hold; GBp 1540). As a base case, we assumed a purchase price of GBp 1924/share (~US$146bn equity value, US$60/ADR) funded with half stock/half cash (3% interest rate based on current rates for A-rated companies), cost synergies of ~$3.7B (10% of total opex), and a simple blend of tax rates. In this scenario, our theoretical DCF value would climb to $44 (from $41 for standalone PFE), and EPS accretion would be 10-16% from 2016-19. Using a 19% tax rate (in line w/ GSK’s) would yield a $46 DCF value and EPS accretion of 15-21% from 2016-2019. We also note that a lowering of the weighted average cost of capital (WACC) based on a more debt-heavy capital structure could be an upside driver.
Valuation and Risks
Our target price is based on a DCF analysis. We model sales over a 10-year period, then determine a terminal value based on a terminal growth rate (we assume 0% terminal growth rate, which we believe to be a conservative assumption). We discount after-tax profits back to mid-2016 at 8.1%, which we believe approximates the company's weighted average cost of capital. Our target implies that the stock can trade at roughly 16.2x our 2016E EPS. Downside risks include: 1) Ibrance regulatory and/or uptake delays; 2) unfavorable vaccination trends; and 3) negative clinical trial data from ongoing trials.
Pfizer