Continuing the torrid pace of M&A in 2018, which in the first quarter had already set a record for announced merger activity, overnight the board of rare-diseases specialist Shire unanimously recommended its shareholders accept the takeover offer from Japan’s pharma giant Takeda which values the company’s equity at £46BN ($62BN) after the Japanese company raised the amount of cash in its offer to secure a recommendation.
After months of foreplay, the Dublin-based Shire had spent the past two weeks conducting due diligence on an offer from Takeda of £49.01 per share, after rejecting four previous offers, due to concerns not only about the offer price but the proportion the Japanese company was proposing to pay in stock, rather than cash.
The proposed offer represents a 59.6% premium to Shire’s March 27 closing price of £30.70 , before Takeda revealed its interest in the company. The final deal is approximately 46% cash and 54% stock, leaving Shire shareholders owning around half of the combined group.
Shire investors will receive $30.33 in cash and either 0.839 new Takeda shares or 1.678 Takeda American depositary shares for each share, the companies said, valuing the offer at 48.17 pounds a share based on the latest price and exchange rate.
The deal, if backed by shareholders, will be the largest overseas acquisition by a Japanese company and propel Takeda, led by Frenchman Christophe Weber, into the top ranks of global drugmakers. The tie-up would also be one of the largest ever in the pharmaceuticals sector, crowning a hectic few months of deal-making as big drugmakers look to improve their pipelines by bringing in promising medicines developed by younger companies, and creating a pharma giant whose $31BN in revenue would place it among the industry’s Top 10, just behind Glaxo.
Takeda, which has seen its market value slide to $34 billion since announcing its interest, is taking over a much bigger rival. Shire’s shares have soared 31 percent, giving the company a market capitalization of about $50 billion. The resulting company will be a leader in treatments in gastroenterology, neuroscience, oncology, rare diseases and blood-derived therapies, used for serious conditions such as hemophilia.
“Shire’s highly complementary product portfolio and pipeline, as well as experienced employees, will accelerate our transformation for a stronger Takeda,” Weber said in the statement.
Shire’s shares, which had been trading about 10 pounds below the value of Takeda’s offer, traded 4% higher at just over 40 pounds, still well under the agreed price and indicating that shareholders still have reservations.
According to Jefferies analysts, the large discount to the offer prices is due to the large stock component and the fact that the deal is not expected to close until the first half of 2019. And although the deal must get the support of 75 percent of Shire’s voting shareholders, some of whom do not want to hold Takeda paper, Weber told reporters he believed investors would back the transaction.
“Their board and our board is confident that both shareholders will see the benefit of the acquisition,” he said.
As Bloomberg adds, with few late-stage experimental drugs in its own pipeline, Takeda needs lucrative new therapies. A Shire takeover brings Takeda treatments forrare diseases such as hemophilia – a field that’s luring a growing number of drugmakers who can charge more for unique life-saving drugs than for routine treatment.
The deal increases Takeda’s exposure to the U.S., the world’s biggest pharmaceutical market. Shire, based in Lexington, Massachusetts, gets more than two-thirds of its revenue from North America. Takeda generates only 30 percent of its sales from the region.
The bidding war ended up being a nailbiter until the last minute as Takeda increased its bid for Shire multiple times over the past month. The companies indicated in late April they had reached a preliminary deal valued at 46 billion pounds, or $64 billion based on a stronger exchange rate for the pound at the time.
Takeda faced a deadline Tuesday set by U.K. regulators to make a firm offer for Shire, walk away or extend the deadline.
The Japanese company said the deal will save about $600 million in duplicated research and development costs. The company expects $1.4 billion in overall savings by the third year. “The cost synergies seem to be much bigger than expected in the next three years,” Credit Suisse analyst Fumiyoshi Sakai said.
This means that jobs will go, with the group’s combined 52,000 workforce likely to be reduced by 6-7 percent. The companies have a number of commercial, research and manufacturing overlaps, particularly in the United States, where both have a large presence in Boston.
Putting the deal in context, a completed merger would dwarf SoftBank Group Corp.’s $40 billion purchase of Sprint in 2013, which ranked as the biggest takeover by a Japanese company. Takeda’s largest previous purchase was a $13.7 billion takeover of Nycomed A/S in 2011. Last year, the company expanded its footprint in the U.S. oncology market with the $4.7 billion purchase of Ariad Pharmaceuticals Inc.
Takeda’s announcement comes amid a flurry of transactions in the pharmaceutical sector, marked by GlaxoSmithKline Plc’s agreement in March to buy out Novartis AG’s stake in their consumer-health joint venture. Merck KGaA has agreed to sell its over-the-counter unit to Procter & Gamble Co., while Sanofi plans to sell its European generic-drug business to buyout firm Advent International Corp.
Takeda said it will maintain its headquarters in Japan and will evaluate consolidating Shire’s operations into Takeda’s in the Boston area, Switzerland and Singapore.
To help fund the cash portion of the deal, Takeda said it has secured a bridge loan facility of $31 billion with JPMorgan Chase Bank NA, Sumitomo Mitsui Banking Corp. and MUFG Bank Ltd., among others. Weber argued Takeda would be able to maintain its investment grade credit rating with a target of achieving a net debt to EBITDA ratio of 2.0 times or less in the medium term.
Finally, courtesy of Bloomberg, here are some sellside reactions to the deal:
- Says expect Shire to trade at a 10%-15% spread to the Takeda offer due to the sizable stock component of the offer, and the length of time till the deal completes
- Owning ~50% of the enlarged Takeda with a Japanese/U.S. listing may be unattractive or problematic for some shareholders
- Offer is reasonable, representing ~60% premium to the unaffected Shire price
- Offer is $30.33 in cash plus 0.839 Takeda shares per Shire share, so same as the previous proposal, values Shire at GBP48.17/share based on FX and Takeda share price per the announcement
- Says the deal likely to be subject to shareholder votes by both sides
- Estimate post-close leverage of >4x net debt/Ebitda
- Offer represents a substantially greater proportion of cash versus previous offers, which was needed to get the deal across the line
- The fact that a large amount of cost synergies are to be derived from the R&D line may trouble some investors
- How the deal is funded longer term remains “somewhat murky”, notes that Takeda has reiterated it is committed to retaining investment grade debt, and a ND/Ebitda ratio of 2x is targeted in “medium term” from ~5x post-deal
- Says approval from both Shire/Takeda shareholders is likely, despite the lack of precedent of this kind of deal by a Japanese co.
- Takeda’s GBP49/share offer for Shire looks “about right” on valuation, but shareholders may balk at the high equity component
- Adds that one way to increase the cash part would be to sell one or more product franchises
- Disposal of Haematology or Immunology would be keeping with Takeda’s strategy, could also attract higher valuation from buyers