Overview of the deal
Acquirer: Takeda
Target: Shire
Estimated value: $62 bn
Announcement date: 08/05/18
Takeda Advisors: Evercore, JP Morgan and Nomura
Shire Advisors: Goldman Sachs, Citigroup and Morgan Stanley
After Takeda’s offers have been rejected four times, they have agreed to pay $62 bn for the rare disease specialist Shire - the largest takeover ever carried out by a Japanese company. The acquisition of Shire will move Takeda into the top 10 within the global pharmaceutical industry and leave Takeda with combined sales of nearly $30 billion pa.
The integration of Shire will give access to new market segments for Takeda, while at the same time enabling the company to expand its geographical reach. The deal will increase market share in the US, the world's largest pharmaceutical market, in which Shire generates two-thirds of its revenues. The deal will also add new drugs to Takeda’s shrinking pool of patent-protected products.
The offer consists of 46% cash and 54% stock, leaving Shire shareholders owning about half of the company. Investors will receive either 0.839 in new Takeda shares as well as $30.33 in cash or 1.678 Takeda Depositary shares for each share. In all, the offer represents a 69% premium to the stock price Shire traded at just before the acquisition was announced.
“The two combined create a rich pipeline in all stages – early and late stage, which is very important," Weber said on a call after the deal was announced Tuesday. “We are in a good momentum and in a strong position.” -Takeda
Company details (Takeda)
Takeda is the largest pharmaceutical company in Japan and Asia and a top 15 pharmaceutical company in the world. The company is focused on metabolic disorders, gastroenterology, neurology and inflammation.
- Founded in 1781, headquartered in Osaka, Japan
- CEO: Christophe Weber
- Number of employees: 29,900
- Market Cap: $30.9 bn - EV: $43.1 bn
- LTM Revenue: $16.7 bn - LTM EBITDA: $3.6 bn
- LTM EV/Revenue: 2.6x - LTM EV/EBITDA: 12.1x
Company details (Shire)
Shire is a global biopharmaceutical company focused on neuroscience and rare diseases. The company’s products are available in more than 100 countries across core therapeutic areas.
- Founded in 1986, headquartered in Jersey, USA
- CEO: Flemming Ørnskov
- Number of employees: 22,000
- Market Cap: $45.4 bn - EV: $65.8 bn
- LTM Revenue: $11.2 bn - LTM EBITDA: -$5.1 bn
- LTM EV/Revenue: 5.9x - LTM EV/EBITDA: -12.9x
Projections and assumptions
Short-term consequences
The acquisition will allow Takeda to boost its global presence. Shire operates in over 100 countries and is highly competitive in the US, while Takeda is primarily active in Japan and emerging markets. The opportunity to tap into the US market brings the greatest upside potential as it is by far the largest pharmaceutical market, accounting for 40% of the industry’s total annual revenue, and it also has the second highest growth rate.
Furthermore, the deal will enable Takeda to get hold of Shire’s portfolio of rare disease medicines, which have significantly higher profit margins than conventional drugs. Coupled with the geographical expansion, this should consequently boost earnings. Takeda plans to use the generated cash flow from the combined company to structure a quick pay-down on the debt part of the acquisition. The goal is to keep their investment-grade rating while targeting a debt/EBITDA ratio of around 2x or less in a few years. However, it is worth noting that the ratio will be as high as 5x EBITDA if the deal closes. Takeda also expects its ROIC to exceed its WACC one year after the acquisition.
As for the financial institutions, M&A advisors are not the only part that stands to benefit from the transaction as several investment banks are competing to underwrite the stock and bond issues that will finance the deal past a $31 billion bridge loan.
Long-term upsides
The deal will solve a major strategic issue for Takeda. Japan’s population is forecasted to shrink by about one-third in the next five decades and drug sales are falling. This coupled with annual drug price revisions made by the government emphasises the need of an expansion overseas. As previously stated, Shire generates the majority of its revenue in the US where the long-term outlook looks far more promising and pricing is more permissive. Hence, they will not only be able to reap the benefits of a more attractive market, but also gradually shift their attention away from a market which is believed to have seen its best days.
In essence, for Takeda to continue to compete they must be able to take the drugs they develop and launch them globally. The acquisition presents an opportunity to do so while at the same time advance Takeda’s Vision 2025 (becoming a best-in-class global pharmaceutical company). It will also enable them to be a leader in specialised medicines through the incorporation of Shire’s global leading rare disease franchise.
Further, it is worth noting that commercial, research as well as manufacturing overlaps exist between the two companies. This has forced Takeda to announce that they will aim to cut approximately 7% of the combined workforce. In all, they expect annual cost synergies of at least $1.4 bn three years after the integration is completed. However, given Shire’s focus on rare diseases, it could be difficult for Takeda to extract any substantial operational synergies.
Risks and uncertainties
Historically, the pharmaceutical industry has seen several competing offers for acquisition targets. However, given that six top-tier investment banks are advising on the deal, other interested companies would face difficulties when trying to assemble a rival bid. There are also few pharmaceutical companies that have the financial power to pull off a deal of this size.
A more pressing threat to the deal comes from within Takeda itself. What started as a small group of shareholders opposing the acquisition has grown significantly in numbers during the last few weeks. One reason for the resistance is that Takeda plans to finance approximately 55% of the deal with newly issued shares. Such a move poses a serious threat to existing shareholders as it will likely dilute earnings per share. However, the group is still far from the 33% of total shareholders that would have to oppose the acquisition in order to derail the deal. The dissenters are looking to convince Japanese retail customers, which own around 25% of all shares, to support their notion. The group have expressed that they wish to vote on the buyout on the annual shareholder meeting. However, it is unlikely that the group will reach the 33% threshold before the meeting on June 28th.
Despite Takeda paying a steep premium and taking on a lot of debt for this deal, it should also be understood that Shire is a company with uncertain prospects. More than 25% of its revenue comes from its Hemophilia unit, a market which is fiercely competitive. Apart from already established players such as Pfizer, Roche has also recently entered that market. Takeda will have to rely on the global expansion, as well as Shire’s rare-disease drugs, to deliver on their earning expectations. If this is not the case, the large debt load could quickly derail the NewCo.
In all, Mr Weber will have to lead what will be one of the most indebted companies in the industry through an extensive cost-cutting procedure while at the same time finding a way to win shareholder support. One way of dealing with the debt issue would be to sell or spin off some Shire assets. As for the shareholder issue, it would potentially be beneficial to bring in one or more long-term strategic investors, such as government funds, which would raise the level of equity and consequently ease shareholders concerns.
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