Shire’s $30bn bid for Baxalta faces significant hurdles

Shire’s hostile bid for Baxter spin-out Baxalta would be one of the biggest ever by a UK-listed company but is likely to turn into a protracted struggle.

Ireland-based Shire went public with a $45.23 per share, all-stock proposal that values Baxalta at $30 billion this week, claiming that Baxalta’s refusal to enter talks “left us with no choice but to make our proposal known to your shareholders.”

The unsolicited offer is a 36 per cent premium on Baxalta’s 3 August share price and – if the deal goes through – Baxalta shareholders would own 37 per cent of the combined group. According to Shire the company would be the ‘global leader in rare diseases’ with sales of $20 billion by 2020 – upping both companies’ internal projections by around $2 billion.

Baxalta – which has only been independent of Baxter for a few weeks – confirmed it had rejected Shire’s proposal privately on 10 July on the grounds that it ‘significantly undervalues’ its business, would be disruptive and is not ‘strategically complementary’.

In a letter to Shire chief executive Flemming Ornskov, Baxalta CEO Ludwig Hantson said the company is “just in the initial stages of implementing our growth strategy as a standalone company and our stock has not yet achieved a price level that appropriately reflects the company’s value and prospects.”

Baxalta has pledged to launch 20 new products before 2020, including new long-acting haemophilia therapy BAX 855, and post sales growth of 6 to 8 per cent a year, adding around $2.5 billion to its annual revenues.

Investors in Baxalta responded positively to the news however, sending the company’s stock up around 10 per cent, although shares in Shire slipped back around 7 per cent yesterday before regaining some ground.

Shire had previously agreed a $54 billion tie-up with AbbVie that fell apart after the US Treasury announced a clampdown on so-called tax inversion deals, which allow US corporations to side-step high corporation taxes by domiciling overseas.

Since then, the Irish company has agreed a string of acquisitions, including a $5.2 billion deal to buy NPS Pharmaceuticals, but the Baxalta proposal is at a much higher level and investors in the company will need to be convinced that the management team is up to the task.

A number of analysts said the rationale for the alliance is sound given the growth prospects for rare disease therapies and opportunities to reduce tax, as well as the potential to diversify and reduce reliance on older products; attention-deficit hyperactivity disorder (ADHD) drugs in the case of Shire and haemophilia drug Advate for Baxalta.

However, they also pointed out that there are a number of obstacles that could prevent the deal going through, not least the possibility of a ‘white knight’ approach from another company.

Baxalta’s shareholders may be reluctant to accept an all-stock deal rather than one which includes a cash component, while a commentary in the Wall Street Journal points out that Baxter armed Baxalta with a ‘poison pill’, in the form of a shareholder rights plan, that could delay any action for up to two years.

The pill prevents any investor acquiring more than 10 per cent of Baxalta and blocks any takeover without the approval of the board, so even with shareholder backing Shire would have to usurp board members to force its proposal through.

As for a white knight, Allergan and Valeant, which have been at the heart of a lot of M&A activity in pharma of late, have both been mentioned in dispatches.

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