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Should Pfizer snap up GSK? Well, a megadeal could speed up a split

May 20, 2015
Life sciences
Pfizer needs to make a deal–or several. It’s obviously amenable to another megamerger, given that it tried to snap up AstraZeneca ($AZN) for more than $100 billion last year. So why not GlaxoSmithKline?
 
That’s Deutsche Bank’s suggestion, anyway. Though it’s not the first time someone has suggested the combo, analysts there are making a detailed case for it. A “material” boost to earnings, the tax benefits of an inversion to a British HQ–not to mention the fact that it would deliver a big M&A bang all at one go.
 
Deutsche Bank’s Gregg Gilbert and his team ran some numbers, assuming a price of 1,924 pence per share, half in stock and half in cash. That structure would boost Pfizer’s earnings per share by up to 16% starting next year.
 
“We believe that the company has a sense of urgency to create value by leveraging the power of its balance sheet to do needle-moving deals,” Gilbert wrote in an investor note (as quoted by Bloomberg).
 
Meanwhile, GSK is looking more vulnerable these days, as its stock continues to falter. Its first-quarter earnings were unimpressive, and CEO Andrew Witty’s action plan leans on slow-but-steady growth, emphasizing volume sales over high-priced meds. Plus, consumer health and vaccines–which GSK beefed up via its sale-and-swap with Novartis–are lower-margin businesses, without the sex appeal of breakthrough prescription drugs.
 
So, say hello to PfizerKline, as Gilbert suggests?
 
Not so fast, Citigroup’s London analysts countered. As Bloomberg reports, analyst Andrew Baum figures that Pfizer has better opportunities elsewhere. Plus, the U.S. company would be facing another political firestorm if it went after Britain’s largest pharma company, which also happens to have a big presence, facility-wise, in the U.K.
 
“We doubt that GSK is a viable acquisition target for Pfizer,” Baum wrote in a note to clients. “While Pfizer could use its offshore cash to invert into GSK and lower its tax rate, we anticipate that government resistance to preserve GSK as an independent listed company is materially higher than it was with AstraZeneca.”
 
Then there’s the question of how well a GSK buy would further Pfizer’s tentative plan to break up, as analysts and investors appear to want so badly. Pfizer snapped up Hospira ($HSP) earlier this year in a deal worth some $17 billion, in a clear bid to build up its Established Products unit, which some observers see as the most likely prospect for a sale or spinoff of some kind.
 
Pfizer wants to build up its vaccines business, which a GSK buy obviously would. Pfizer also has a consumer health business that could use some augmentation, and GSK has a joint venture in that field with Novartis–a venture that’s now the biggest consumer health operation in the world. It’s also true that Pfizer execs seem to think that any well priced, well done deal would put them closer to a viable split.
 
And a megadeal could accelerate a breakup. As CFO Frank D’Amelio said during the Q1 earnings call with analysts, “If we were to do a large transaction, and as Ian said before, we’re agnostic to size … it clearly could impact our timeline.”
 
By Tracy Staton
 

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