M&A, Pharma

Can Takeda actually close its $65B deal to buy Shire? Maybe, but analysts aren’t sure they should

Takeda has upped its offer to buy Shire $SHPG for a mix of stock and cash worth close to $65 billion, which is good enough for the Lexington, MA-based biotech to extend the deadline on their talks to May 8 after determining they were close to finalizing a pact.

Late Tuesday Shire reported that Takeda had upped its bid to £27.26 in new Takeda shares and £21.75 in cash, coming to £49 a share. That rings up at 0.839 new Takeda shares and $30.33 for each Shire share — or close to $65 billion, with Takeda tacking about $2.5 billion on its previous offer.

In a statement, Shire noted that its board said they would recommend the offer, provided they can get through some remaining hurdles, including their due diligence work.

But it’s not a done deal yet, and there are considerable doubts whether it’s in Takeda’s best interest — or Shire’s — to complete the process. Those doubts were heightened after investors drove Takeda’s shares down 7% in the wake of the agreement, leaving the stock down about 20% since talks were disclosed — hardly a ringing endorsement.

Will a 44% cash/56% equity deal sufficiently entice Shire’s grumbling shareholders? Maybe, says Jefferies analyst David Steinberg. He noted:

While this offer represents a solid improvement over Takeda’s third bid (38% cash), we still wonder if it is enough to satisfy SHPG shareholders, who would still bear some not insignificant risk going forward as ~50% owners of NewCo. Of interest, SHPG now seems to be engaging – and stepping away from prior commentary that a similar (4% lower) bid “significantly undervalues the company”. And we believe that the latest offer of ~$205/ADR by Takeda will be considered attractive to many SHPG shareholders, particularly if it has a greater component of cash vs stock.

Bernstein’s Ronny Gal looked at the risks to the deal and still estimated a likely completion at 80% to 90%, given a willing buyer and a willing seller at the table. But he’s not so sure that Takeda’s investors are on board.

The risk to the deal is unlikely in our view to come from Shire shareholders or anti-trust authorities. However, Takeda shareholders (and potentially the board) may prove resistant given the stock decline.

Neither Gal nor Steinberg think a hostile bidder is likely to come along at the last minute, given all the attention to this deal as it brewed, though the possibility remains. Anybody who has thought of doing it has probably decided to stay out of it. (GSK chief Emma Walmsley also got her chance today to brush off the question, ruling out a bid no one thought possible in any case.) And Allergan CEO Brent Saunders isn’t likely to change his mind after getting slapped down quick for mentioning an interest.

This is what Takeda CEO Christophe Weber has been working towards since he was named to the top job — aiming at building a global operator with roots in Japan — and investors are clearly fretting about the reality of it. With a little more than $4 billion in cash on hand, the idea of the smaller Takeda buying up Shire and leaving Shire investors with half of the stock in the post-merger biopharma company is not sitting well with everyone.

Some analysts have been wondering why Takeda would pay a premium for a company that is facing stiff headwinds on key franchises as Roche advances Hemlibra for hemophilia and its ADHD group confronts the eventual loss of control over their Vyvanse IP.

Weber, though, shows no signs of wavering in his determination to complete this deal.

There are a few key issues that will need to be completed:

— Agreement of certain other (unspecified) terms of the revised proposal.
— Satisfactory completion of a confirmatory due diligence review by Takeda.
— The unanimous and unconditional recommendation of the board of Shire.
— And final approval by the board of Takeda.

Takeda followed with a release of its own stating:

Takeda and its Board have remained disciplined with respect to the terms of the Revised Proposal and Takeda intends to maintain its well-established dividend policy and investment grade credit rating.

A matchup with Shire would give Takeda a huge Boston/Cambridge research group — even after some presumed deep cuts in personnel — expanding on Shire’s move to concentrate its forces in Lexington and Cambridge following its Baxalta buyout. Takeda has also been gathering its R&D forces in the big Boston hub. A deal would also likely signal a further wrenching reorganization for local Shire staffers, who have been through repeated revamping under CEO Flemming Ornskov while Takeda has spent much of the past two years restructuring and cutting research.

A mega-merger like this, dwarfing a series of acquisitions in Q1, would also leave biopharma investors hunting for the next big target, with 2018 shaping up as a big year for buyouts.

Image: Christophe Weber, president and chief executive officer of Takeda Getty

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