The news bright and early Wednesday morning that Takeda $TKPYY was planning to make a run at Shire $SHPG caused more than a little head scratching among some of the analysts covering these companies. And it also caused some fretting among the Japanese company’s investors, who took Takeda’s share price down 7% on Thursday.
What kind of price makes sense for Shire, which has had its share price beaten down over the past year? And how should Takeda go about buying a company with a somewhat larger market cap, where the premium acquisition price will likely pass $50 billion?
One other issue floating around right now is whether Takeda’s move will simply kick up an offer from a Pfizer or AbbVie, which could most likely push Takeda to the curb without trying too hard.
Ronny Gal and the Bernstein team noted that Takeda is one of those “serious” companies, not likely to do something like this for the fun of it. That’s a good point: Takeda keeps things buttoned down tight. Now that they’ve started, Bernstein implies, they’re going to want to finish it. But should they?
The numbers: Financially, the deal looks stretched. The combined debt of the two companies is $22B and their EBITDA is $11B. Thus assuming $500M in cost reductions and (4x net debt/EBITDA) Takeda could finance a Shire bid of £40/$170 ($52B market cap) with $24B cash and $28B equity. This means Takeda will be paying more than its market cap and give Shire shareholders 40% ownership of the combined company.
Bottom line: Most Shire shareholders will sell for a 20-25% premium, given the unclear horizon for stock recovery. The challenge, most would want to limit exposure to Takeda post deal and this would be a stumbling block moving forward. We expect the public announcement ahead of approaching Shire probably has to do with management reluctance to consider equity-heavy ~£40/$170 offer and starting a dialog with shareholders on this issue.
Wild cards: We expect most large pharma companies have a takeout model of Shire and the Takeda’s announcement will force them to make a decision whether they want to step up. PFE and ABBV (covered by Anderson) are the names referenced most often. However, neither is a perfect suitor (and both have been discussed as having preference elsewhere).
Up to now Takeda CEO Christophe Weber has been happy to focus on bolt-on deals, ranging from TiGenix to Ariad, at $5 billion. This is a whole other league he’s playing in now.
“Takeda is just desperate to beef up its pipeline, and they’ve been doing small bits of acquisitions on the biotech side,” Fumiyoshi Sakai, a Tokyo-based analyst at Credit Suisse Securities, told Bloomberg. “But how they are going to finance $40-some billion? That’s another one.”
Peter Welford at Jefferies had this to say:
The numbers: We note Takeda’s current market cap is around $42bn, which compares to Shire’s c.$47bn but $66bn EV including $19.1bn Net Debt at YE2017. Hence, we presume Takeda would need a significant equity raise to acquire Shire, suggesting a “merger” is perhaps better terminology, which may raise hurdles to the successful completion of any future deal.
Bottom line: We see the possible strategic fit given the Japanese pharma’s focus therapeutic areas of oncology, gastrointestinal and neuroscience, with Shire bolstering the latter two franchises. Furthermore, Shire’s leading global position in rare diseases would likely be attractive for most large pharma/biotech, particularly given the long duration assets in immunoglobulin and enzyme replacement therapy. However, given the ongoing complex integration of Baxalta since June 2016, an acquisition at this time carries incremental risks, in our view.
Wild cards: Shire has six WW Phase III programmes ongoing, notably SHP621 for EoE, SHP647 in IBD, maribavir for CMV, plus soon SHP607 for pre-term infant complications. We believe many of these are underappreciated and could drive longer-term upside.
I’ll keep up with the comments as they come in. But one thing is clear: This is no slam dunk for Takeda, no matter how serious they are. And there are companies out there who could change this discussion in a heart beat.
Christophe Weber. Bloomberg via Getty Images
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