Pfizer (NYSE: PFE.US)announced yesterday it would buyHospira for about $15 billion: how bad is that for AstraZeneca(LSE: AZN) shareholders? Very and heres why.
Downside
Almost everybody in town knew it could end badly for Astra shareholders, but I reckon the full extent of the damage has yet to become apparent. The downside for Astra shareholders is 20% or more from this current level (4,456p), in my view.
Now that Pfizer is officially out of the game although it may target smaller deals in the region of $70bn the drop in Astras share price could be even more painful because investors may feel entitled to abandon Astra, betting on Shire and GlaxoSmithKline instead.Both Shire and Glaxoboast more promising prospects, and are relatively cheaper than Astra, based on a series of factors, including fundamentals.
On 28 October 2014, soon after Pfizer decided to allocate billions of capital to buy back its own stock, I warned our readers. Ever since, Astra stock has risen 3.2%, which compares with a +6.2% performance for the FTSE 100. During the period Shire has risen 21%, and even Glaxo has done much better, recording a +8.2% performance.
Who should take the blame? Of course, Astras chief executive officer, Pascal Soriot, is under pressure to show investors he was right to reject Pfizers proposal, which was 25% higher than Astras current equity value, and included a large Pfizer stock component.
A mighty task
October 2014
Id also suggest that looming US and Irish rules on tax inversions are playing their part, a senior analyst told me back in October, when I flagged the risk of holding Astra shares.
They (regulators) already scuppered the Abbvie/Shire takeover, and since Pfizer/AstraZeneca was a similar tax-driven move theres no reason to expect Pfizer to re-enter the bidding, at least not at anywhere near the previous price, since a combination wont have the same tax breaks that it might have had earlier, he added then.
So, big funds have been left holding an overvalued stock that pays a decent dividend. Whats next, then?
Of course, Mr Soriot has the opportunity to turn things around. Dont ask me how I have no clue, really. What I know is that Astra has a medium-term plan according to which earnings will grow at an astonishing rate over the next few years. What I also know, however, is that Mr Soriot had better be quick, because deals such as the acquisition of thebranded respiratory drug business of Actives in the US and Canada which was announced on Thursday in the wake of disappointed Q4 results wont move the needle and wont keep investors happy for long, either.
To be honest, I don’t think Astra is worth the pain, and I’d rather diversify my portfolio by addingsome of the shares included in this ad-hoc report, which wasrecently published by our Fool Team.
These companies have solid balance sheets and strong cash flows, so I would be very surprised if their shares didn’t end up some 15% to 20% higher this years, for a pre-tax return thatis consistent with our track record — and excludesmarket-beating dividends!So, I strongly suggest youdownload the report right now, bysimply clicking here!
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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has recommended shares in Glaxo. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.