It was as if millions of investment bankers’ voices suddenly cried out in terror and were suddenly silenced. While this is probably too dramatic a view of today’s announcement that Pfizer would not, after all, split, several bankers will surely be hastily redrafting their pitch books.
That said, there is probably no need for them to despair just yet. The immediate loss of the business of rearranging the world’s biggest pharma group – and pitching the same idea to others – should partly be offset by the uptick in M&A that a larger company will be capable of sustaining.
What could happen is of course far more interesting than what could not, and ordinarily news that something was not going to take place would barely move the needle. Still, since Pfizer’s 2013 spin-out of the animal health business Zoetis, the group’s broader separation has been a constant theme of quarterly updates.
A long time ago...
Between then and now, however, a lot had changed, and the standard wording Pfizer uses in today’s statement – that, over time, a potential gap between its market valuation and a sum of the parts of the standalone divisions had closed – actually has legs.
Sellside models drawn up almost three years ago, with which Pfizer broadly agreed, suggested a $207bn sum of the parts versus a then market cap of just $195bn (Pfizer’s big split will require a big bid to release real value, January 30, 2014). Today that market cap stands at $205bn.
There are other factors too. The group’s failure to buy first AstraZeneca and then Allergan pointed to significant political mood changes over tax inversions, and in this new environment a split might well have created what Jefferies analysts called “tax dis-synergies”.
While Pfizer might not admit openly to this, its body language had changed of late. “Under present tax laws I don’t see a separation as being a quick route to improving the tax situation,” its chief executive, Ian Read, stated on a second-quarter call; in stressing that a split was not a make-or-break decision he appeared to be walking back from the idea.
Investors and deal bankers alike will also note that the broader industry trend seems now to have moved in favour of retaining size. Just last week GlaxoSmithKline’s appointment as chief executive in waiting of Emma Walmsley – its head of consumer health – suggests that pharma's mixed-business model will be around for some time yet.
What bankers will want to know is whether this could cause deal business to dry up. The obvious answer must surely be no.
The bigger a company is the more capable it will be of taking on large amounts of debt carrying today’s historically low interest rates, for instance. Even after Pfizer’s $14bn takeout of Medivation the group could still do a big takeover, and a move for Celgene or a wounded Gilead remains a mouthwatering prospect.
Back in 2013 the suggestion was that Pfizer was considering separating into three standalone divisions: innovative products, vaccines/oncology/consumer health, and established products. Along the way this changed to a potential split into two – established (later renamed “essential”) products, and the rest.
That move depended on three years’ audited financials being published for the units on a standalone basis, and Pfizer determined to decide one way or the other by the end of 2016. Already in 2011 Jefferies analysts had suggested that a split made sense, but reversed the view three months ago; today they said Pfizer’s decision was not a surprise.
The company seems likely to leave open its option for a future split, the analysts state, but more immediately it may continue hunting for M&A. There is no immediate cause for deal bankers to fear that something terrible has happened.