WYETH's UPCOMING AMALGAMATION WITH PFIZER: Shareholder of which company gains?

By Geetanjali Kedia

• Pharma MNCs Pfizer Limited and Wyeth Limited, both, have yesterday on 20^th November 2013, announced scheduling of respective board meetings on Saturday 23^rd November 2013, to consider a Scheme of Amalgamation of Wyeth Limited with Pfizer Limited and to consider declaration of interim dividend.

• The above scheme is on the lines of the global parent. In January 2009, Pfizer Inc., world’s largest pharmaceutical company by sales, and makers of the highest ever selling drug, Lipitor, used for lowering cholesterol, acquired competitor Wyeth for US $ 68 billion in a stock-cum-cash deal, adopting the inorganic route to mitigate declining sales from its drugs losing patent protection.

• Nearly four years after Wyeth went in Pfizer’s fold, the Indian subsidiaries of each of them, hitherto functioning as two separate listed entities, are to be merged into a single company. While it is known that Wyeth Limited will be merged into Pfizer Limited, replicating the parent as well as the latter being a bigger company, with nearly 2 times the former’s revenue. 

• Pfizer Limited has equity of Rs. 29.84 crore (face value Rs. 10 each). Its Shareholding Pattern as of 30th September 2013 stands as under:

• Wyeth Limited has equity of Rs. 22.72 crore (face value Rs. 10 each). Its Shareholding Pattern as of 30th September 2013 stands as under:

• In Wyeth Limited, promoters hold 1.16 crore shares, while non-promoters own 1.11 crore shares. Since it is a Scheme of Amalgamation, Wyeth will be merged into Pfizer, through issue of fresh equity shares of Pfizer Limited.

• Based on yesterday’s closing price of Pfizer of Rs. 1,412 and Rs. 780 of Wyeth, arithmetically it implies that 61 lakh new equity shares of Rs. 10 each of Pfizer Limited will be issued to non-promoter shareholders of Wyeth Limited, holding 1.11 crore equity shares of Rs. 10 each of Wyeth Limited, implying a swap ratio of 1.8:1.  

• Based on current Enterprise value (market cap deducted for net cash), the swap ratio works out to 2:1 while based on book value per share as of 30th September 2013, the swap ratio is closer to 2.2:1.

• The swap ratio, if closer to 2.2:1 i.e. one new share of Pfizer Limited for every 2.2 shares of Wyeth Limited, would be seen a favouring shareholders of Pfizer Limited. This can be justified as Pfizer is bigger than Wyeth with annual revenue run rate of Rs. 1,200 crore, vis-a-vis Rs. 700 crore for the latter.

• Needless to say, from the promoters’ viewpoint, 2.2:1 works better as non-promoter holding of Wyeth at 48.88% is higher than Pfizer’s non-promoter holding of 29.25%. But, this would be unjust to minority shareholders of Wyeth Limited.

• Pfizer has surplus cash of Rs. 1,478 crore, as of 30th September 2013, while Wyeth Limited has cash and equivalents of Rs. 440 crore, as of that date. With no immediate capex requirement, surplus cash explains the consideration of declaring interim dividend by the boards of both the companies on Saturday.

• It will be a very prudent and shareholder friendly move if Wyeth declares an interim dividend of about Rs. 150 per share (outlay of Rs. 400 crore, including corporate distribution tax), so as to utilise the entire surplus cash, on its books exclusively for its own shareholders.

• Pfizer, the second biggest foreign multinational in India after GlaxoSmithKline, in terms of domestic sales, has 6 of its brands among top 100 pharma brands, with Corex (cough formulation) and Becosules (multi-vitamin) being the most popular. Wyeth is a market leader in oral contraceptives, folic acid and depilatory cream.

• While margins of Wyeth Limited have been declining in H1FY14 (reflected in share price which is flat year-to-date, against 36% rise in share price of Pfizer), Pfizer has also witnessed de-growth due to sluggish sales of anti-infectives and respiratory medicines.

• The merger will create synergies in terms of operations, R&D and therapy areas, leading to cost savings and creating a larger entity valued at close to Rs 2,000 crore in terms of revenues and 9th in terms of market share in India’s Rs 72,000 crore retail pharma market.

• To summarise, swap ratio is likely to be in the range of 1.8:1 to 2.2:1, with former benefiting Wyeth shareholders while latter better for Pfizer shareholders. The company has the carrot (and a real big one) of interim dividend to pacify either of the shareholders. All eyes now on the how they play their cards on the 23rd of November.

Our Verdict:

We feel that the company should move on the following lines

1. Wyeth declares interim dividend of about Rs. 160 per share, making the ex-dividend share price of Rs. 650 (current price of Rs. 810)
2. Pfizer declares interim dividend of Rs. 120 per share, making the ex-dividend share price to Rs. 1,300 (current price of Rs. 1,420)
3. Based on ex-dividend share prices, the resultant swap ratio is a perfect 2:1.