Is a deal to create ‘PfizerKline’ in the offing?

The rumour mill has been grinding away furiously in the last few days, focusing mainly on a possible bid for GlaxoSmithKline (GSK) by Pfizer.

The speculation about a deal to create ‘PfizerKline’ has been rife since the Pfizer was thwarted in its efforts to close a £70 billion merger deal with AstraZeneca (AZ) last year, but was lent additional momentum after Deutsche Bank analyst Gregg Gilbert issued a research note discussing the rationale and value behind such a deal.

Gilbert says clearly in his report that his assessment has been prompted by “media reports” but nevertheless says the combination would benefit Pfizer by allowing it to “unlock access to its balance sheet and improve its tax situation.”

Pfizer has a hefty cash pile sitting overseas that cannot be repatriated to the US without being heavily taxed – and a $17 billion merger with injectable generic specialist Hospira still leaves it with plenty of loose change.

Moreover, it needs short-term deals to boost revenues and help it recover from the loss of patent protection in the last few years for blockbuster brands including cholesterol drug Lipitor (atorvastatin), Celebrex (celecoxib) for arthritis, antibiotic Zyvox (linezolid) and erectile dysfunction therapy Viagra (sildenafil).

GSK’s recent difficulties – the corruption scandal in China, a US respiratory franchise under pressure and lower-than-expected take-up of some new products – have all taken their toll on the company’s market cap and brought it into range for a Pfizer offer, despite a business-transforming asset swap with Novartis.

GSK’s market cap is now an AZ-size £71.3 billion, having been close to £90 billion before its recent run of trouble, and considerable attention is now being paid to the company’s future strategy under new chairman Sir Philip Hampton.

Deutsche Bank makes a detailed case for GSK/Pfizer joining together, based on a purchase price of 1,924 pence per share – half in cash and half in stock – that would value GSK at around $146 billion. Cost synergies from the deal could be as high as $3.7 billion, equivalent to around 10 per cent of operating expenses.

Regardless of the financial benefits of such a deal, a takeover bid for GSK would probably lead to just as strong opposition in the UK as the proposed merger with AZ, as GSK has considerably more infrastructure in the country and is in the midst of a major manufacturing investment programme.

That makes a bid from Pfizer unlikely according to some analysts, including Citibank’s Andrew Baum who told Bloomberg that “government resistance to preserve GSK as an independent listed company is materially higher than it was with AstraZeneca.”

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