TheChek News Flow

- UK Takeover Code limits scope for poison pill

- CEO Soriot may not be ready to leave

AstraZeneca’s [LON:AZN] defence tactics against Pfizer [NYSE:PFE] rely first and foremost on price, it is understood. More traditional UK defence tactics such as attracting a white knight or selling off assets were talked down.

There was a sufficient gap between Pfizer’s GBP 50-per-share proposal Friday morning and the price required for AstraZeneca’s board to consider a takeover offer, it was said. If the price had been closer to the board’s value of the company as an independent entity, then language used rejecting the proposal would not have been so strong.

Shareholders are supportive of the board’s rejection of Pfizer’s initial approaches, it was said.

Rumours earlier this week pointed to the possibility of AstraZeneca putting a poison pill in place to fend off the takeover approach. However, industry bankers thought this was unlikely given that the UK Takeover Code limits the scope for frustrating action. A poison pill would also require shareholder approval.

The only viable defence strategies to prevent a takeover by Pfizer would include AstraZeneca pushing a value creation strategy through regular shareholder engagement, a white knight, returning capital and selling assets, the first banker said.

AstraZeneca was quick to reject Pfizer’s bid bump to GBP 50 per share, calling the terms inadequate and substantially undervaluing the company. The terms are not a basis on which to engage with Pfizer, AstraZeneca’s board said. The large proportion of the consideration payable in Pfizer shares and the tax-driven inversion structure remain unchanged, the statement noted.

Pfizer’s approach today had a 2% higher cash weighting than the January approach.

Implementing poison pills is a far easier practice in the US. In April, Allergan implemented a poison pill within 24 hours of a merger proposal from Canada’s Valeant. In that approach Valeant was offering each Allergan share to be exchanged for USD 48.30 in cash and 0.83 shares of Valeant common stock. Similarly, in 2012 US-based Illumina implemented a poison pill shortly after Swiss giant Roche approached it with a takeover bid.

In the UK, there is very limited recourse in terms of tactical or structural intentional poison pills, the first banker said. Shareholders can approve a poison pill, but this would preclude them from receiving an offer, an unlikely arrangement for any shareholder, he added.

A merger of equals with either AbbVie [NYSE:ABBV] or Amgen [NASDAQ:AMGN] is a possibility in theory, an M&A advisor familiar with AbbVie said. But it is difficult to see AstraZeneca pulling off such a move, the advisor said, adding AbbVie in particular is facing its own problems as a number of patents expire.

Pipeline value

Today’s bid follows AstraZeneca giving FY17 earnings guidance above consensus expectations, broker upgrades, and a cancer immunotherapy deal with British private biotech Immunocore. AstraZeneca has a busy year ahead in terms of pipeline news flow including late-stage trials for anaemia and anticancer drugs.

A shareholder previously told this news service that AstraZeneca’s shares did not reflect the upside potential from the oncology pipeline, potentially a mega-blockbuster area. This shareholder said a price closer to GBP 60 per share than GBP 50 would reflect the pipeline value.

The second banker claimed the pharma industry thinks that AstraZeneca’s pipeline is not worth the premium shareholders are seeking. Out of its 11 candidates set for filing in 2017-18, half may not even make it to filing based on the company’s historical data.

When Pascal Soriot took over as chief executive officer in 2012, his aim was to turn around ailing R&D operations, the third and fourth industry bankers commented. There may even have been a strike price and options in Soriot’s contract that would trigger the price point for a takeover, the second banker argued.

It may be too early for Soriot to sell the company because he has not yet been able to make his mark, the second banker contended. Soriot is shaking things up to have more innovation and relocating the R&D operations to Cambridge where there is a gene pool of talent, he added.

However, it was noted that AstraZeneca’s board has a duty to shareholders, and not Soriot. The CEO could be seen as already having succeeded at the company by reinvigorating AstraZeneca’s pipeline and bringing more energy to the role than its previous chief.

According to Dealreporter’s historic database the UK has seen 36 hostile bids since 2006, of which 15 (42%) lapsed. The average upward price revision was 15% ranging from 2% to 38%. Pfizer’s latest approach was at a 7% increase to its January offer.

This bid has echoes of Kraft’s [NASDAQ:KRFT] hostile bid for Cadbury, which was launched with a bear hug offer and subsequently raised twice before the offer completed. AstraZeneca’s defence team includes Goldman Sachs’ Karen Cook and former Morgan Stanley banker Simon Robey, who both worked on Cadbury’s defence team.