Valeant Pharmaceuticals and Zoetis have at least one key investor in common: Bill Ackman. As a result, there have been speculations that the two could end up merging, and now those speculations appear to be closer to coming true.
Media outlets reported on Thursday that Valeant had approached Zoetis to talk takeover. Here’s hoping we don’t have a repeat of all the drama that was Valeant’s attempt to buy Allergan.
Details on the rumored offer
The Wall Street Journal reported last night that Valeant Pharmaceuticals had made a “preliminary approach” to buy Zoetis, which specializes in animal vaccines. Zoetis’ market capitalization was around $25 billion on Thursday before the report about the rumored talks. The vaccine maker’s stock had already been trading near its all-time high.
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It’s unclear what Zoetis’ management had to say about Valeant’s approach, if anything. They have said in the past that they may gobble up some assets in order to expand the company, although since Pfizer spun it off in 2013, many have considered it to be a potential takeover target itself. The suggestion became even stronger when Ackman picked up a stake in Zoetis and a seat on the company’s board.
The Journal’s sources said Ackman and his partner on the investment, Sachem Head Capital Management, were said to be pushing for cost-cutting measures and consideration of potential buyout offers. Ackman’s firm, Pershing Square Capital Management, teamed up with Valeant last year when it made an unsuccessful hostile bid for Allergan. The fact that he has stakes in both Valeant and Zoetis may suggest to some that he could have a hand in the former’s offer for the latter.
Shares of both drug makers surged after the initial reports of the supposed talks, with Zoetis climbing as high as $55.37 per share. The increase was short-lived, however, as the stock slumped by as much as 10% during regular trading hours today, falling to $49.84 per share.
There was similar movement in Valeant shares, which climbed briefly touched $233.18 per share but then fell as much as 1.89% to $228.80 per share during regular trading hours today.
Would a Valeant- Zoetis deal make sense?
Needless to say, Wall Street is buzzing today with opinions on whether or not a Valeant – Zoetis tie-up would be a good thing. JPMorgan analyst Chris Schott and team see Zoetis as an “attractive growth business” for Valeant to add to its portfolio. They think it’s possible that Zoetis would generate a topline compound annual growth rate of between 5% and 7% over time.
Specifically, they note that animal health products don’t have the same patent expiration “cliff” as other pharmaceuticals. Also the animal health industry has very limited exposure to regulation and insurance companies.
One area they’re unsure about is synergies. Zoetis currently aims to trim $300 million of its costs in the next couple of years by dumping almost 40% of its SKUs and reducing its presence in 30 international markets. Because Valeant and Zoetis do not have much overlap in their businesses, there may be few synergies that would come out of a combination.
The JPMorgan team thinks a tie-up between the two drug makers would be “modestly accretive,” but they see potential upside driven by an expansion of the combined company’s multiple. The reason for this is because the combined company would be well-positioned in a number of “attractive markets” and be poised for “significant long-term growth.”
Morgan Stanley notes that the math is a bit of a stretch as their charts below indicate: