Pulling off the AZ gambit

How Pfizer needs to balance stock, cash to pull of AstraZeneca gambit

Pfizer Inc. (NYSE:PFE) still has room to maneuver if it is really intent on using its bid for AstraZeneca plc (LSE:AZN; NYSE:AZN) to relocate in the more tax-friendly U.K.

The trick is to provide enough cash to win over AZ's shareholders, while also using enough stock to re-domicile in the U.K. Pfizer has missed the mark twice thus far, but still has room to sweeten the cash component.

Last Monday, the companies confirmed reports that AZ rejected a January offer that valued the U.K. pharma at £46.61 ($78.51) per share, or £58.6 billion ($96.2 billion). AstraZeneca said the proposal undervalued the company and, with a 70/30 split between stock and cash, was too heavily weighted towards shares.

On Friday, Pfizer upped its offer to £50 ($84.23) per share - valuing AZ at £62.9 billion ($105.9 billion). The offer was 68% stock and 32% cash. It represented a 32% premium to AZ's share price of 3,781.50p on April 17, the last trading day before reports of the initial bid on April 20.

AZ swiftly rebuffed the second offer.

Pfizer has made no secret about its desire to use the deal to relocate to the U.K., where the corporate tax rate is 21% and will fall to 20% in 2015. The pharma's effective tax rate was 27% last year.

But for Pfizer to realize the tax benefits of re-domiciling in the U.K., AZ's shareholders need to end up owning at least 20% of the combined entity.

Friday's offer would have resulted in a merged company that was 73% owned by Pfizer shareholders and 27% owned by AZ shareholders.

If nothing else changes, Pfizer could raise the cash component to 54%, or £35 billon, and still leave AZ shareholders with a 20% equity stake on a fully diluted basis.

Pfizer reported $32.4 billion in cash at Dec. 31, plus $69 billion in unremitted earnings from international subsidiaries earmarked for investment overseas.

AZ shareholders will want to maximize the cash, said Gemma Game of AXA-Framlington, which holds positions in both pharmas.

Game said there is a small risk of intervention from the U.S. government given the amount of tax revenue the U.S. Treasury would lose if Pfizer were to re-domicile.

Barring that, however, she suggested a deal seems likely given the premium Pfizer is willing to pay. "Since Pfizer's deal values Astra higher than its stand-alone fair value, I'm not sure that the cash/stock

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