The Fourth Proposal Tops the Others (Until the Next Proposal)
This morning, AbbVie Inc. (NYSE-ABBV) announced a Fourth Proposal in its attempt to co-join with Shire PLC (Nasdaq-SHPG, LSE-SHP). The updated merger consideration is comprised of £22.44 cash and 0.8568 ABBV per SHP share (for an indicative value of £51.15). Using a 1.7115 USD/GBP exchange ratio, the proposal valued SHPG at $262.55 per share (based on the ABBV closing price of $57.40 on 7/7/14). The implied proposal premiums for SHPG shares are 37% to the prior day ($191.71), 47% to the prior 20 day average close ($178.88), 51% to the prior 40 day average close ($174.38) and 86% to 12/31/13 ($141.29). The implied 2014E and 2015E valuation multiples for standalone SHPG (deal-related excluding any tax efficiencies and operating synergies) are 20.0x and 17.9x EV/EBITDA and 27.0x and 24.4x P/E, respectively. Later in the morning, SHPG released a statement noting ABBV did not give the company notice of its “revised conditional non-binding proposal” before it was publicly announced and that its Board will meet to review it.
The latest proposal was made 10 days before the 7/18/14 deadline for the firm intention of an offer to SHP. The implied deal value is an 11% increase over the prior £46.26 per SHP share indicative value and is inline with shareholder expectations of a $260/share deal price. The current proposal reflects a 31% premium to the initial indicative value of £38.97. Despite the apparent “good news” of the higher proposal price, SHPG shares traded down to the low-$230s (after being indicated in the $240/share range pre-market). Our thoughts on the weakened ABBV price in trading today are as follows: • The recent failed attempt by Pfizer Inc. (NYSE-PFE) to reach an agreement to merger with UK-incorporated AstraZeneca PLC (NYSE-AZN) after making four proposals does not inspire much confidence that this situation will be different; • ABBV share price has traded straight down this morning which we ascribe to a mix of additional share hedging (both the proposal and the sector) and concerns that the stock will return to the low-mid $50s range on no transaction; • Expectations that ABBV would increase its proposal had been priced into SHPG over the past week and investors are taking profits on the trade; and • ABBV has been bidding against itself and is running out of room to meaningfully increase the merger value of a final Proposal.
Assuming a $210/share SHPG downside (similar to the ~20% discount to the last PFE proposal of £46.26 per AZN share indicative value), the deal probability has swung from 60% pre-market to 40% currently. We believe 50% is more appropriate (at least until the SHPG Board issues a formal response) and that the dynamics of this situation are better than the AZN/PFE. On 6/20/14, SHPG rejected ABBV’s Third Proposal, emphasizing that it undervalued the “full benefits” of its growth strategy to double revenues to $10B by 2020 (“10x20” plan). This does not seem to be outright rejection of an unsolicited proposal based on a long-term business strategy to bring conceptual R&D products to market (the AZN defense) but rather ascribing the right price premium for an existing drug portfolio with product extension possibilities. We believe this latest proposal is meant to at least get the parties to the table to have meaningful discussions (which is one step farther that AZN/PFE).
SHPG does not have the same political and economic exposure in the UK as AZN, and ABBV is less that half the size of PFE. While a transaction is not going to fly under the radar screen, it certainly should attract less attention over tax efficiencies than the PFE proposal; ABBV had an overall FY13 tax rate of ~22% compared to 27% for PZE. ABBV may have limited room to increase its current proposal; we estimate 4% P/F 2014 EPS accretion using $500M savings, a 5.5% blended interest expense, and an adjusted 13% tax rate for ABBV standalone and deal synergies. However, we believe SHPG could trade up to the mid-$240s if the parties at minimum agree to have serious discussions prior to the upcoming firm offer deadline. The companies seem to have more compatible corporate cultures than AZN/PFE; SHPG has had a history of making tuck-in acquisitions and ABBV was spun off from Abbott Laboratories (NYSE-ABT) in 2013. We believe that ABBV is committed to a transformative deal; the proposal put forth today is a signal of support from SHPG shareholders that had indicated $260/share was an acceptable takeover value.