(Bloomberg Gadfly) -- The market is doing its job. After a sustained period of poor performance, drugmaker Shire Plc has attracted the attention of Takeda Pharmaceutical Co.
A full-blown takeover would be highly ambitious -- perhaps too ambitious -- for the Japanese suitor. But Shire's defenses are weak and the other big pharmaceutical groups are on the prowl.
Shire stock has fallen 45 percent in the last 15 months, mostly the result of the poorly received acquisition of Baxalta Inc. in June 2016. Management credibility is weak. Even after gaining on Takeda's interest, the shares, at about 36 pounds, trade at a big discount to peers on both earnings and Ebitda multiples. UBS analysts have a price target of 40.95 pounds on the stock.
Takeda says it is considering an approach. There are no talks let alone a concrete offer. The stated logic for a deal would be to strengthen the Japanese group's oncology, gastroenterology and neuroscience businesses and boost its presence in the U.S. Takeda also covets Shire's rare disease franchise.
It's hard to see big opportunities to cut costs here. Shire has a peculiar therapeutic mix and, as UBS notes, a bidder could jeopardize Shire's favorable tax rate too. The hemophilia franchise also faces stiff competition.
In reality, the attraction is that Shire is cheap and vulnerable -- something which other bidders will see.
The challenge for Takeda is structuring a deal. The suitor has a market value of 4.4 trillion yen ($42 billion) compared with Shire's 28 billion pounds ($40 billion) before takeover interest emerged. Use a three-month volume-weighted average share price, and Shire's valuation is a little higher. Those relative sizes mean Takeda would need to craft an offer largely in its own stock.
If Shire shareholders couldn't, or wouldn't hold shares that trade in Japan, Takeda might have to provide an additional U.K. listing -- as Dana Inc., of the U.S. is proposing in its bid for GKN Plc's automotive business. It's all quite fiddly.
Unfortunately for Takeda, it may suffer a first-mover disadvantage. Who else might see an opportunity? Novartis AG has a strong balance sheet and will soon receive $13 billion from the sale of its share in a consumer health joint venture to partner GlaxoSmithKline Plc. That said, Novartis has suggested its M&A strategy is about bolt-ons and Shire would be way too big to qualify.
Paris-based Sanofi is acquisitive in the hemophilia area, although its leverage is creeping up with recent deals and it would probably also have to resort to funding any offer in stock too.
Abbvie Inc. is another possibility -- it's just had a major setback with one of its main pipeline drugs, and tried to buy Shire in 2014.
Put a 33 percent takeover premium on Shire's undisturbed price, add net debt, and a full-blown takeover would cost about $73 billion. But with Shire expected to make about $7.6 billion in operating profit in 2021, generating a decent return on a deal within the foreseeable future wouldn't be hard for an acquirer -- even without any synergies.
If Takeda wants this, it will now have to move fast to get a deal done and build some momentum around a transaction. As for Shire, it has the beginnings of a defense based on its undervaluation. It needs to start making the case.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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