Pfizer (PFE) Needs to Sweeten Offer for AstraZeneca (AZN) - Deutsche Bank

Pfizer (NYSE: PFE) needs to sweeten its offer for AstraZeneca (NYSE: AZN), thinks Deutsche Bank analyst Mark Clark. Earlier Chairman Leif Johansson said Pfizer’s proposal "would dramatically dilute AstraZeneca shareholders’ exposure to our unique pipeline and would create risks around its delivery. As such, the Board has no hesitation in rejecting the Proposal.”

"Pfizer has proposed an offer for AstraZeneca worth £50 per share which includes slightly higher equity and cash elements than the deal initially floated in private talks in January 2014 (the offer now stands at 1.845 Pfizer shares plus £15.98 in cash per AstraZeneca share vs 1.758 Pfizer shares plus £13.98 cash previously). While we expect this to be sufficient for AstraZeneca to enter into a dialogue, we strongly doubt this will gain the requisite AstraZeneca Board recommendation given that the new offer is pitched at just 7% above the January offer (which was dismissed in AstraZeneca’s press release earlier this week as “very significantly” undervaluing the company)," said Clark.

"We expect Pfizer ultimately to have to sweeten its offer based on (1) discussions we have had with investors (many citing a price within the £52-55 range and some above this) and (2) our analysis of the EPS accretion for Pfizer which shows relatively limited sensitivity to increasing the cash component of its offer (given the low returns on cash). For example, were Pfizer to retain the equity component of its offer (ie, 1.845 Pfizer shares per AstraZeneca share) but to lift the cash element by £5/share, taking the offer to £55/share (with 38% cash), we calculate that year three accretion would be lowered by just 2% (from between 9-17% to 7-15%, based on hypothetical cost savings in the range of $2-4bn and assuming AstraZeneca’s tax rate applies to the whole group). By our calculations £55/share is roughly the point at which the NPV of the cost savings (taking the mid-point of the hypothetical $2-4bn range mentioned here) and tax benefits would equal the premium paid to the unaffected share price of circa £38/share before the press reports surfaced," he added.

Deutsche Bank has a Hold rating on AstraZeneca.

For an analyst ratings summary and ratings history on AstraZeneca click here. For more ratings news on AstraZeneca click here.

Shares of AstraZeneca closed at $81.09 yesterday.

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