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Shire shares trade almost 4% lower after US group Allergan – mooted as another suitor for the specialty pharmaceutical outfit – declared it would not make an offer. This reduces competition for SHP as a target and puts the ball back in Japanese Takeda’s court, having confirmed that it made an official third bid of 4650p (which SHP has already rejected). Unless of course there are other suitors out there, which there may well be. Any news on this front would be sure to give SHP shares another boost, adding to the volatility we have seen of late.
Of interest to us yesterday was wording in Takeda’s statement that it would “remain disciplined with respect to terms of any offer” and that it “intends to maintain well-established dividend policy and investment grade credit rating”. The former suggests, after three bids already, that it may not be prepared to go much higher (a 50% premium to the undisturbed late March price is already hefty); the latter suggests it is not prepared to load up on debt and risk its credit rating, especially with Moody’s having already questioned its ability to finance a deal with already stretched finances following multiple acquisitions.
Takeda’s offer comprises just 37% cash with the balance coming from new shares, and SHP shareholders would own approx. 51% of the new combined group, depending on Takeda’s market cap. This represents risk with a significant 63% of the offer linked to the value of Takeda shares, which could be trading anywhere by the time the deal finally closes. They already closed at 14-month lows overnight on the prospect of a further strained on its finances and possible shareholder dilution to boot.
SHP is sure to want a bigger cash component at the very least, if not a higher bid. Don’t forget that AbbVie upped its bid for Shire several times in summer 2014. Its first offer comprised 44% cash (£20.44 of a £46.11 bid) but the final offer saw this rise to 46.5% (£24.44 of the final £52.48 bid) with the rest payable in new AbbVie shares.
If Takeda won’t budge on its £46.50 offer (eerily close to AbbVie’s first approach) then it would surely have to on the 37% cash component. Having been promised £24 by AbbVie 3½ years ago, why wouldn’t SHP shareholders demand £24 again? The problem is that this would equate to over 51% of Takeda’s £46.50 offer, which its balance sheet might not be able to cope with. Watch this space.
Mike van Dulken, Head of Research at Accendo Markets, 20 April 2018
This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.
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