M&A Shouldn't Be This Easy, Really

(Bloomberg Gadfly) -- M&A shouldn't be this easy. London-listed drugmaker Shire Plc has nudged Japan's Takeda Pharmaceutical Co. to up its takeover proposal twice to 44 billion pounds ($62.5 billion). Allergan Plc said on Thursday it was considering a bid only to say it wouldn’t after its shares suffered a bad reaction. This auction may have a bit further to go.

Takeda must have thought it was dangling a knockout price for Shire. While the target rejected the 46.50 pounds-a-share proposal, it has at least opened talks. Not surprising given the price mooted is 51 percent higher than where Shire's shares stood before the would-be purchaser popped up.

M&A Shouldn't Be This Easy, Really

The problem for Takeda is that it would need to fund much of any deal in stock. Its pitch comprises 16 billion pounds in cash and the rest in its own shares, which are listed in Tokyo and the U.S. Even so, the combined entity's leverage would exceed four times forecast Ebitda. There may be scope for Takeda to put more cash in -- but not much.

A takeover of a U.K.-quoted company using so much Japanese stock is unprecedented. To some shareholders outside Asia, the prospect of holding Tokyo-listed stock is going to be a problem. How big isn't clear. A rival bidder from the U.S. or Europe could therefore have an advantage if it offered the same price, partly paid in its own stock.

Allergan could certainly use a deal: Its Restasis treatment for dry eyes faces looming generic competition. An offer with the same cash-share mix as Takeda's would have pushed net leverage to similar levels.

M&A Shouldn't Be This Easy, Really

It's far from certain others will join in an auction. Novartis AG, which has just offered $8 billion for Avexis Inc., has historically preferred smaller transactions. With the exception of its purchase of Genentech Inc. in 2008, it's the same story with Roche Holding AG.

Sanofi has only just been on a spending spree. AbbVie Inc. has enough long-term issues to grapple with before adding Shire. Pfizer Inc. is a fan of large deals and a more realistic possibility -- but it arguably has better options.

How high could the bidding go? The current pitch is worth about 58 billion pounds, including assumed net debt. Based on forecasts for Shire's operating profit three years hence, a buyer could still make a return of more than 7 percent without synergies, which is just about good enough.

Takeda's pitch is worth about 13 times trailing Ebitda, less than the average takeout multiple of 15 in pharma deals in the last two years. That reflects the fact that Shire was trading at a discount before Takeda's interest emerged.

But there's a reason for that. Shire's hemophilia business accounts for a quarter of revenue. The franchise is under short-term threat from Roche's recently approved Hemlibra, and longer-term peril from firms like BioMarin Pharmaceuticals Inc. that are racing to develop gene therapies that may reduce or eliminate the need for the medicines Shire currently sells.

Shire has a potential blockbuster set to get FDA approval later this year. But a solid chunk of the drug's early growth will come from cannibalizing Shire's older medicines.

Perhaps Shire feels it can sit back and let an auction push the stock price -- still below its one-year high of 50.21 pounds -- further skywards. But its standalone defense isn't that strong. The case for a much higher offer has yet to be made.

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.

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

To contact the authors of this story: Chris Hughes in London at chughes89@bloomberg.net, Max Nisen in New York at mnisen@bloomberg.net.

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