Shire and Baxalta have agreed on their $32bn (£22bn) merger after six months of negotiations, sending Shire's share price plummeting 7.25 per cent yesterday. Despite impressive pre-market gains in New York, Baxalta shares also fell, down 1.55 per cent.
Baxalta shareholders will receive $18.00 in cash and 0.1482 Shire shares per Baxalta share, amounting to a total value of $45.57 per Baxalta share.
The offer is worth around $32bn and represents a 37.5 per cent premium over Baxalta’s unaffected share price on 3 August last year, before Shire made its first announcement.
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The company said in a statement it expected the combined company to be the largest rare drugs maker, accounting for 65 per cent of total global annual sales, with over $20bn in revenue by 2020.
Shire chief executive officer Flemming Ornskov took time out of the JP Morgan healthcare conference in San Fransisco to defend the deal's rationale:
Our due diligence has reinforced our conviction that these companies are stronger together. This proposed combination allows us to realize our vision of building the leading biotechnology company focused on rare diseases. Together, we will have leadership positions in multiple, high-value franchises and become the clear partner of choice in rare diseases.
He added that the new offer was "more attractive" than the first deal Shire out to Baxalta last summer, which was all equity, with a large share buy-back. The new offer has a "significant cash company, and still preserves the tax-free nature of the deal".
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The deal will also deliver an estimated $500m of cost savings, from combining operations and head offices. This does not include “significant” tax savings, which will enable US-based Baxalta to take advantage of Shire's lower rate of tax in Ireland where it is headquartered.
The company expects to pay tax at a rate of 16 to 17 per cent, compared to US corporation tax rates of 35 per cent. Shire, which is in the FTSE 100, will retain its listing on the London Stock exchange, with a secondary listing on the New York Stock Exchange, where Baxalta is listed.
Ornskov reassured investors that "we have made all the relevant diligence and enquiries with regards to the tax-free nature of the deal... and we are confident the new offer still preserves the tax free nature of deal".
That said, he added: "It is very important to say this deal is not about tax inversion, its about growth, and a more diversified portfolio. We will be the undisputed leader in the sector."
Joe Stelzer, managing partner at Cavendish Corporate Finance, maintained tax status was an important driver behind M&A in the sector:
As with previous headline deals in big pharma, tax status has proved a focal point, as the major players juggle jurisdictions. Baxalta’s effective tax rate will be significantly slashed thanks to the deal.
The bigger picture for Shire is the need to diversify away from an uneven pipeline of products towards a new emphasis on rare diseases and biotech – the modus operandi being the frenetic pace of acquisitions that has become commonplace across global big pharma.
The Shire / Baxalta agreement sets the tone for a busy 2016 following the explosion in M&A activity last year, led of course by the unprecedented $160bn Pfizer / Allergan tie-up
Shire will fund the deal with an $18bn loan, which City A.M. understands is underwritten by Morgan Stanley and Barclays. Shire said it hopes to pay off the debt quickly, so it can return to an investment grade rating with a debt to earnings before interest, taxes, depreciation and amortisation (Ebitda) ratio of 2x or 3x.
Consultants Freeman estimates that the arrangement fees could be worth 0.2 per cent to the banks, $35m. Overall, bankers advising on the deal stand to make $140m. Shire's advisers, Morgan Stanley, Evercore, Barclays and Deutsche could earn up to around $60m from their role in the deal. Goldman Sachs and Citi stand to make up to $80m from advising Baxalta.
Baxalta’s chairman, Wayne T. Hockmeyer, is expected to become deputy chairman of the combined company. Two more directors from Baxalta will be included in the combined company's board, but no mention was made of whether Ludwig N. Hantson, Baxalta's chief executive, would also have a place in the new business.
The combined workforce will be 22,000: 16,000 from Baxalta and 6,000 from Shire, although there will be some job losses where operations overlap and savings can be made.
Despite the focus on paying off the debt, Ornskov, who has overseen 13 acquisitions since taking over at Shire in 2013, wouldn't rule out more purchases in the near future.
While investors may have had their doubts, Michael Levesque, senior vice president at Moody’s, was more optimistic about the deal, telling City A.M.:
Shire has double-digit revenue growth, but the Baxalta acquisition makes strategic sense because it catapults the company into the leading rare disease company. Pharmaceutical products that treat rare diseases have high price points, fewer competitive offerings and good pricing flexibility.
Over the summer, FTSE-100 listed Shire made an all-share $30bn (£19.2bn) offer to pay $45 per share, a 36 per cent premium, which was rebuffed. Baxalta said the price was “nowhere near” the value the board was seeking. Shire came back to the table with a larger cash component, it was reported late last year.
Shire is waiting for investor approval for its $6bn takeover of Dyax, a US biotech company, which was announced in November last year.
The deal is expected to complete later this year, and the companies should be fully integrated by 2017.
This could mark the beginning of a busy year for deals in the industry, Arthur Wong, director, pharmaceuticals at Standard and Poor's, told City A.M. he expected the "torrid" volume of M&A to continue.
There's still an over-capacity in the industry, it's fragmented, there's a lot of attractive targets there to diversify portfolios. Companies need to grow and become more diverse: they're flush with cash, interest rates are still relatively low, so the quickest way [to grow] is with acquisitions.