20th May 2014
As Pfizer (NYSE:PFE) returns to its North American home with its tail between its legs following the rejection by the AstraZeneca (LDN:AZN) board of its £70bn shares and cash offer, investors have a lot more to ponder than if the bid – as once seemed probable – had succeeded.
Investment journalist Tony Levene considers the issues.
Had Pfizer won, it would have been simple. The primacy of markets would have been retained and the populist reaction against the bid might have subsided in a week or two. All investors would have had to do would have been to decide what to do with the cash element – around 45 per cent of the total – and whether to keep the Pfizer shares which made up the balance.
But Pfizer has lost. It has been humiliated. It knows there is little point in stretching the takeover rules by a direct appeal to investors, telling them to go over the head of the board by asking major shareholders to “urge the board to begin substantive engagement”. It’s an eleventh hour plea that has gained traction with number of fund managers who see their bonuses and league table positions falling as fast as AstraZeneca’s share price – at £43.02 compared with a final Pfizer £55.
It’s not been just about two of Big Pharma’s leading lights slugging it out, however. There has been huge public interest, and even if the government claimed to be neutral, it was clear that there were behind the scenes pressure. And the same happened in the US where the tax-saving part of Pfizer’s rationale for the bid has gone down like the proverbial lead balloon.
This might presage a new look at bids for self-styled British jewels (even if they largely operate in other countries) and at “financial engineering”. The takeover system still faces criticism over Kraft’s absorbing Cadbury which cost British jobs even if in a less glamorous sector when it come to R&D.
Fans of Kondratieff Long Wave theory will note that it is now a generation or about thirty years since the Big Bang took the restraints off UK plc. And what goes around, can come around. The bid has forced some investors at least to look beyond the next quarter.
What happens to AstraZeneca now?
There’s no way the firm can rewind back six months before the first contact between the two companies in late November, which led to a preliminary offer worth £46.60 a share in early January.
While the chances of a resurrection of the present bid are tiny, once a company is in play, it tends to remain there. All sorts of financial firms are now running their spread sheets over the UK-based drugs giant. Could it be broken up into bite-sized bits? Is there another Big Pharma company out there with the cash and the will to take on AstraZeneca? And could Pfizer make a new attempt in late November when the six months takeover ban ends? The answer to all these questions is that no one knows – except they are being asked.
AstraZeneca itself has to justify rejecting £55 a share – a premium of around 25% to the current price and about two thirds higher than its pre-bid 200 day moving average of some £32. Even if the share price put on £1 to £43 in the hours following the final Pfizer failure, it’s going to be tough for the board if in the next year or two, if the share price does not approach or beat the bid price. Worse, the UK drugs firm’s board has to justify the £59 it was holding out for.
It is unclear what strategy change will bring a £59 valuation compared to £43 – or how long equity holders will have to wait. In common with other Big Pharma companies, AstraZeneca faces a fall off in patent products income and a wait for the next wave of drugs to go on sale – assuming those in the research pipeline see the light of regulatory day.
Investors will remember that Marks and Spencer (LON:MKS) turned down a 400p a share bid a decade ago. Although now trading at 447p, it has spent the majority of that time below 400p, only beating the bid more recently thanks to the overall performance of the Footsie.
Will shareholders still wave Union Jacks if the AstraZeneca share price fixes at its current levels?
What happens to Pfizer now?
No one is taking bets on how long Ian Read, the Pfizer chief executive officer, will last. His board decided on openness – admitting the bid was a tax move and confessed that there would be UK job losses –, exposing its own problems. And who would want to be a Pfizer adviser?
Pfizer’s share price appears to be going nowhere – and has been going nowhere for the past year. Now that it has been seen in its full naked horror, it could be on the receiving end of a bid. It has little defence – other than deep pockets.
It would still like to take AstraZeneca. And it could come back in six months time. It might, if the target fails to perform.
“I wouldn’t rule out Pfizer coming back with the same total offer but with a greater proportion in cash,” said Justin Urquhart Stewart of Seven Investment management. “I don’t think many AstraZeneca shareholders are very keen on holding Pfizer paper.”
What about the big investors?
These include BlackRock, Legal & General Investment Management, Scottish Widows Investment Partnership, Invesco Asset Management, Schroder Investment Management, State Street Global Advisors, and Aberdeen Asset Managers.
Some fund managers have expressed anger that the board allowed the bid, and the bid premium, to evaporate when there is nothing else on the table. And whether for or against the bid, many fear that the politics seen in this bid will work against the “rights of the shareholder to be the final arbiter”.
One big investor said: “This is the biggest single destruction of value for shareholders of all time. Personality clashes and politics has triumphed over shareholder value creation.”
Axa, a major holder with 4.6% said it was “very disappointing” and ending the deal was “not necessarily acting in shareholders’ best interests.”
Fund manager Alastair Gunn at Jupiter Fund Management stated: “We are disappointed the board of AstraZeneca has rejected Pfizer’s latest offer so categorically. They should have at least engaged in a constructive conversation with Pfizer on the details of the offer to assess the opportunities that a combined entity could bring. There now seems little room left to manoeuvre with Pfizer having ruled out a hostile bid. We will be expressing our dissatisfaction to the AstraZeneca board over the way the bid process has been handled up to now.”
Schroders urged the company to restart talks with Pfizer. It said it was disappointed with “the quick rejection by the AstraZeneca board” and the decision by Pfizer to “draw a premature end to these negotiations by calling their latest proposal final”.
But some fund managers backed the UK firm’s board. M & G fund manager Richard Hughes cautions against short-termism while Anne Richards, chief investment officer at Aberdeen Asset Management, a 2.4% holder, said Pfizer’s offer “certainly wasn’t a knock-out”.
The most supportive – certainly in the number of words expended – is Neil Woodford who is launching his new Woodford Asset Management. He said:
“Scientific collaboration with expertise in the same location can often be the difference between success and failure. However, this is for politicians and commentators to ruminate over. But, my duty as a fund manager requires sticking to the narrower issue of shareholder value in this bid situation and to deliver the best long term result for my investors.
“Of course, in coming to that judgement I must consider all the key issues that will impinge on value. The most important of these is the subject of AstraZeneca’s pipeline. The company’s current portfolio of approved drugs will generate cash flows now and in the future. The key difference between those that might advocate cashing in now and those holding for an independent AstraZeneca future, will be the value that is attached to the pipeline of yet to be approved drugs.”