Shire's $30bn hostile bid for Baxalta

Less than 10 months after fighting off a $54 billion takeover approach from Abbvie, Shire Pharmaceuticals has launched a $30 billion all-share bid for Baxalta. It's certainly a bold move and one to which the market reacted badly. Shire's share price plunged as much as 8% on the news Tuesday amid fears it will take more to coax the Americans into talks.

Shire has clearly done the maths and makes some big claims. If the deal gets done it will create a company with the industry’s largest rare diseases portfolio of at least 50 projects, and generate $20 billion of product sales by 2020. Expect double-digit top-line growth and a positive impact on earnings per share (EPS) a year after completion.

"It is our strong preference to immediately enter into a negotiated transaction to explore the full potential of the proposed combination and finalize the terms of an agreement," said Shire CEO Flemming Ornskov.

And that's the rub. Baxalta hasn't even agreed to talks yet. "Baxalta has declined to engage in substantive discussions regarding the proposal," admitted Shire which offered 0.1687 of its American Depository Receipts (ADRs) for every Baxalta share. That valued the target company's stock at $45.23, a 36% premium to last night's closing price, but it will be less following today's sell-off.

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Shire has been trying to get Baxalta chief Ludwig N. Hantson to the negotiating table for the past month. "We have sought to engage with you regarding such a combination since early July," wrote Ornskov in a letter to Hantson published in the news release. "Other than a brief meeting on July 10 at which we outlined our proposal and its benefits, your lack of engagement has been surprising.

"On July 31, weeks after receiving our written proposal and without any meaningful interaction, you stated that you had concluded it was not a basis for discussions. As a result, you have left us with no choice but to make our proposal known to your shareholders. We believe they deserve an opportunity to consider it."

Clearly, Shire can afford to do this deal. Forecast year-end net cash of around $800 million leaps to $3.5 billion in 2016, according to forecasts from Shore Capital, rising substantially year-on-year thereafter.

And the price is fair, too, valuing Baxalta at 15 times the last twelve months cash profit compared with its own historic multiple of 13.5. But the Americans obviously want more, and the fact they're not even talking suggests it may take extra billions for Shire to get its man.

Snapping up Baxalta would also scupper any chance of Shire - a perennial takeover favourite - of being bought itself. No wonder shareholders trousered profits. Shire shares had risen over 5% in the past month and almost 50% since October.

But despite pharma deals worth hundreds of billions of dollars done this year already, there is a chance this one will not happen. UK drug companies have a poor record in big-money M&A in recent years. Remember, Abbvie's failed bid for Shire came just five months after Pfizer abandoned its $118 billion offer for AstraZeneca. To nail Baxalta Shire will have to pay up.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.