Why Shaxalta could run and run

The fact that it took Shire barely a month from first trying to engage Baxalta in takeover talks to going public with a hostile proposal today says as much about the fresh Baxter spinout’s surprise at being targeted as it does about Shire’s need to acquire.

After all the heat was on Shire to defend itself, with Allergan primed for a big takeover thanks to a reloaded capital structure and Biogen needing to buy to prevent it falling prey to a low-ball bid. But while it makes sense to use Shire stock as acquisition currency hard cash might be needed to persuade Baxalta, and here lies an issue that could lock the parties in stalemate.

The problem is that the July 1 separation from Baxter of Baxalta, the biopharmaceutical business, was structured specifically as a tax-free distribution. Shire throwing cash into the mix would affect that status, potentially making Baxter’s US shareholders liable to tax for the cash received above the spinoff's value.

This suggests that, if Baxalta management digs in its heels and insists on cash, Shire might need to pay over the odds as compensation for the loss of the tax-free status. Its other option is to go directly to Baxalta investors with a formal hostile offer – a risky strategy that would take up many months of management time.

Going public

For now all we have is Shire going public with its desire to buy Baxalta, in what is an attempt to shame the target’s management and force it to engage in discussions. On July 31 Baxalta had dismissed a formal proposal “without any meaningful interaction”, Shire said.

Shire revealed that this initial approach had come literally days after Baxalta was formally launched as a standalone entity. The Ireland-domiciled group appears not to have approached Baxter before the spinoff, though holding off might have been necessary to preserve the move’s tax-free status.

In any case Shire management says it has been interested in the haemophilia market – Baxalta’s key focus – for some time. On a call today Shire’s chief executive, Flemming Ornskov, insisted that his company wanted to become a leader in rare diseases, and that buying Baxalta would bring this about.

However, less than a year after AbbVie’s attempt to buy Shire fell through, Shire is seen as ripe for acquisition, and will want to ensure that it is not picked up cheaply. It is hard for its pursuit of Baxalta not to be seen as defensive, though Mr Ornskov insists that the two groups’ strategies are “carbon copies of each other”.

And Shire has the market’s backing, its stock closing at an all-time high yesterday. The shares were off 4% today, presumably on the risk of dilution by the issue of new stock to finance a Baxalta takeover.

Generous?

At Shire’s current price the proposal values Baxalta at around $29bn, equivalent to 32% above yesterday’s close. This premium does not seem to be especially generous, and neither does the basic valuation – roughly a 16.5x multiple of 2015 operating profit, according to EvaluatePharma consensus forecasts.

Shire’s announcement therefore looks like just the opening salvo in a protracted battle. If a cash element is not viable Shire will have to persuade Baxalta management and investors of the logic of a proposed share buyback, which currently amounts to some $9bn over two years.

This looks like a novel way of maintaining a 100% stock offer while also promising a subsequent cash reward. However, it hinges on Shire’s valuation holding up in the near term; and of course a buyback can only be a promise at present.

In the meantime many things can happen. A new buyer for Baxalta could emerge – Sanofi is another group with a rare disease position – or Shire could itself still be acquired by a company like Allergan (Teva turns back the clock, July 27, 2015).

At least it is now clear how important spinoffs are to releasing hidden value in a complex corporate entity; on this score both Baxalta and Shire will be in full agreement.

To contact the writer of this story email Jacob Plieth in London at jacobp@epvantage.com or follow @JacobPlieth on Twitter

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