AstraZeneca rejects Pfizer’s final offer worth $118B

British drug maker AstraZeneca has rejected the fourth and final takeover offer worth $118 billion by Pfizer Inc on Monday saying the offer continues to have a high stock component and the overall proposal undervalues the company.

Pfizer offered AstraZeneca shareholders 1.747 shares in the combined entity and 2,476 pence in cash, representing an indicative value of £55.00 ($92.53) per share.

This marked a 2.8 per cent increase compared with the third proposal made last week in which Pfizer had offered an indicative value of £53.50 a share, comprising 1.845 shares in the combined entity and 2,157 pence per AstraZeneca share. Last week, AstraZeneca indicated that its board believes that Pfizer's £53.50 proposal substantially undervalues the company.

Previously, on May 2, Pfizer offered 1.845 shares of the combined entity besides £15.98 in cash for each share of AstraZeneca. The proposal represented an indicative value of £50 per AstraZeneca share and pegged the total deal value at $106 billion. Early this year Pfizer had offered a combination of cash and shares in the combined entity which represented an indicative value of £46.61 ($76.62) per AstraZeneca share, a premium of approximately 30 per cent to AstraZeneca’s closing share price on January 3, 2014, a day before the previous offer was made.

The new proposal pushes up the cash component of the deal for AstraZeneca shareholders, one of the contentious issues over which the British drugmaker’s board had rejected the previous overtures.

Relative to Pfizer’s May 2 proposal, the final offer marks an increase of the cash consideration of £8.78 per share, or £11.3 billion; an increase in the cash component as a proportion of the total consideration from 33 per cent to approximately 45 per cent; a substantial increase in current indicative value of approximately 15 per cent; and an aggregate increase in the total current indicative value of approximately £9.1 billion or $15.3 billion.

Under the final proposal, Pfizer and AstraZeneca shareholders would own approximately 74 per cent and 26 per cent, respectively, of the combined company.

On the basis of Pfizer’s closing share price of $29.12 on May 16, 2014 and the exchange rate on that day, the proposal represents a premium of approximately 45 per cent to the unaffected closing price of an AstraZeneca share of £37.82 on April 17, 2014 (being the date before market speculation of a possible offer by Pfizer for AstraZeneca); 53 per cent to the closing price of an AstraZeneca share of £35.86 on January 3, 2014, being the trading day immediately prior to the date of Pfizer’s January proposal; 24 per cent to the current value of Pfizer’s January proposal; and 34 per cent to AstraZeneca’s all-time high closing price (prior to 17 April 2014) of £41.03 per share since the formation of the company in 1999.

Ian Read, chairman and CEO of Pfizer, said: “We believe our proposal is compelling for AstraZeneca's shareholders and that a Pfizer-AstraZeneca combination is in the best interests of all stakeholders. We are excited at the opportunity to create a scientific powerhouse, delivering great benefits to patients and science in the UK and across the globe.”

He added that following a conversation with AstraZeneca, Pfizer does not believe that the AstraZeneca board is currently prepared to recommend a deal at a reasonable price.

“We remain ready to engage in a meaningful dialogue but time for constructive engagement is running out. We have said from the beginning that we will remain disciplined in the price we are willing to pay and we will not depart from that guiding principle. We believe that our proposal represents compelling and full value for AstraZeneca and that other issues that have been raised by AstraZeneca do not represent material difficulties,” he added.

Pfizer confirms that it will not make a hostile offer directly to AstraZeneca shareholders and will only announce a firm intention to make an offer with the recommendation of the board of directors of AstraZeneca.

Leif Johansson, chairman of AstraZeneca, said even assuming that other key aspects of any proposal had been satisfactory, the price at which the company’s board would be prepared to provide a recommendation would have to be more than 10 per cent (over £58.85 a share as against £55 a share in the final offer) above Pfizer’s Friday proposal.

“The final proposal is a minor improvement which continues to fall short of the board’s view of value and has been rejected,” he added.

He said Pfizer has failed to make a compelling strategic, business or value case.

“As an independent company, the entire value of AstraZeneca’s pipeline will accrue to our shareholders. Under Pfizer’s final proposal this value would be significantly diluted,” Johansson said.

“We have rejected Pfizer’s final proposal because it is inadequate and would present significant risks for shareholders, while also having serious consequences for the company, our employees and the life-sciences sector in the UK, Sweden and the US,” he added.

AstraZeneca said the majority of the consideration in the final offer continues to be in Pfizer shares which many AstraZeneca shareholders will be forced to sell. Further, for those AstraZeneca shareholders able to hold Pfizer shares, the board believes Pfizer’s proposals would materially alter the investment case and create risks and uncertainties.

In particular it pointed out the risks associated with delivery of cost reductions and imply a meaningful reduction in research and development potential and capabilities; integration would risk significant disruption to the delivery and value of AstraZeneca’s pipeline; Pfizer’s announced business segmentation, if it were applied to AstraZeneca’s business, would likely lead to value destruction and also noted that the tax-driven inversion structure remains a key part of Pfizer’s proposals.

The inversion structure has already been the subject of intense public and governmental scrutiny, particularly in the US, as a result of Pfizer’s possible offer for AstraZeneca. The board said it believes this structure brings increased uncertainty as regards the delivery of value for AstraZeneca shareholders.

(Edited by Joby Puthuparampil Johnson)

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