Pfizer Agrees to Pay $68 Billion for Rival Wyeth
Pfizer Agrees to Pay $68 Billion for Rival Wyeth
By ANDREW ROSS SORKIN and DUFF WILSON NY TIMES
The board of Pfizer, the world’s largest drug maker, agreed to acquire a rival, Wyeth, for $68 billion, the companies announced Monday.
The deal not only create a pharmaceutical behemoth but would be a rarity in the current financial tumult: a big acquisition that is not a desperate merger of two banks orchestrated by the government.
It will also be the first big merger backed by Wall Street in months. While credit has been notoriously tight of late, five banks have agreed to lend Pfizer $22.5 billion to pay for the deal. Pfizer, which has roughly $26 billion in cash, would finance the remainder through a combination of cash and stock.
If completed as planned, the transaction would be the biggest merger since AT&T and BellSouth combined in a $70 billion deal in March 2006, according to the research firm Capital IQ.
Pfizer also said Monday that its net income for the fourth quarter dropped 90 percent from the period a year ago, citing a charge to resolve inquires into its off-label promotional practices. In its statement, it also said that it planned to its work force by about 10 percent and reduce the number of manufacturing sites. The company also said that it would cut its dividend.
Pfizer earned $268 million, or 4 cents a share, in the fourth quarter, down from $2.72 billion, or 40 cents a share, in the period a year ago. Revenue dropped 4 percent, to $12.35 billion. Excluding the $2.3 billion to settle the marketing inquiry, Pfizer had a profit of 65 cents a share. Analysts surveyed by Thomson Reuters had forecast 59 cents.
“The combination of Pfizer and Wyeth will meaningfully deliver Pfizer’s strategic priorities in a single transaction,” the Pfizer’s chief executive, Jeffrey B. Kindler, said in a statement Monday. “Our combined company will be one of the most diversified in the industry and will benefit from complementary patient-centric units that match speed with the benefits of a global company’s scale and resources.”
The merger almost came unhinged at the 11th hour. While the boards of both companies agreed to the broad outlines of the deal and its price before the weekend, these people said, one issue was still a sticking point: whether Pfizer would be allowed to back out of the deal if the economy worsened or Wyeth’s prospects faded.
In better times, deals often falter on matters of strategy or price. But in this case, because of the ailing economy, Pfizer has agreed to pay a staggering breakup fee, $4.5 billion, if it does not complete the deal under certain circumstances — if, for example, its credit rating drops and it can no longer finance the deal. That is almost twice the typical breakup fee for a deal of this size.
If the acquisition is completed, it may demonstrate that Wall Street is willing to lend again, at least to the nation’s top companies with the best credit ratings.
“If banks need to send a message that they’re loaning, they want to be loaning to this quality of company,” said Catherine Arnold, an analyst at Credit Suisse.
Pfizer’s bid is being financed by four banks that received federal bailout money: Goldman Sachs, JPMorgan Chase, Citigroup and Bank of America, the people involved in the deal said. Such banks have been criticized for not doing more lending since they received the government aid.
Barclays, which acquired Lehman Brothers out of bankruptcy in the fall, is also providing financing, these people said.
Pfizer appears to be taking advantage of the bad market for credit to buy Wyeth at a lower price than it might fetch if competing bids were to emerge, which analysts do not expect.
“They have a unique opportunity now because not everybody can get that capital,” said Barbara Ryan, an analyst at Deutsche Bank.
Because the combined company is expected to generate more than $20 billion in cash a year, Ms. Ryan said, “even when they borrow money, they will still have plenty of revenue.”
Under the terms of the deal, Pfizer would pay $50.19 a share for the company — $33 a share in cash and 0.985 Pfizer shares worth $17.19 a share based on Pfizer’s closing price on Friday. That is roughly a 29 percent premium over the share price before word of the deal leaked on Friday.
Both companies’ boards of directors approved the deal.
Wyeth’s management team would depart, the people involved in the negotiations said. Pfizer is also planning to cut its quarterly dividend in half to 16 cents, these people said, in an effort to maintain its credit rating.
After news reports disclosed the talks on Friday, investors applauded the possibility of a deal. Shares of Wyeth rose $4.91, or 12.6 percent, to close at $43.74. Pfizer climbed 24 cents, or 1.4 percent, to close at $17.45.
Pfizer expects to save $4 billion annually by combining with Wyeth; those savings will be phased in over three years.
Mr. Kindler of Pfizer, first approached Wyeth last spring with a phone call, people involved in the talks said. The negotiations heated up in the summer but appeared to collapse when the banking system went into a tailspin in September and October.
Since then, there were several brief moments when it appeared the deal would move ahead, but then the talks would fall apart once again, usually over financing, these people said. It was apparently only within the last week or so that the financing commitment came together.
For Mr. Kindler, a lawyer who came to Pfizer from McDonald’s, the deal may be a job-saver. His and the company’s most pressing challenge has been the impending expiration of patent rights to the cholesterol-lowering drug Lipitor — which accounted for a quarter of the company’s 2007 revenue of $48 billion and remains the best-selling drug in the world. The patent ends in 2011.
Still, even with the Wyeth deal, much would remain undone for Pfizer as it faces product, patent and pipeline problems for other drugs as well.
“It’s not just Lipitor,” Ms. Arnold wrote last year in a report to investors. Pfizer faces a run of 14 patent expirations through 2014, which would add up to lost revenue of about $35 billion as those drugs give way to cheap generics, according to Ms. Arnold. Pfizer’s patent problem is not unique among the big drug makers. Merck, Bristol Myers Squibb and Eli Lilly are all facing their own patent losses in the next five years. “Everybody’s staring at the same challenges down the road,” Ms. Ryan said.
She said that Mr. Kindler, who became chief executive in July 2006, had probably not been in a position to make a play for a company like Wyeth until after he had cut costs, revamped Pfizer’s core business and accepted the reality that the research pipeline was not producing blockbusters. “Hope springs eternal from the research pipeline,” Ms. Ryan said.
As part of the deal with Wyeth, both companies will have to repatriate tens of billions of dollars back into the United States, which could have a high tax cost. Pfizer reported $25.3 billion in revenue, 52.2 percent of its total, from overseas operations in 2007, according to securities filings.
If foreign profits were repatriated to the United States, Pfizer would have to pay the difference between the tax paid in the foreign country, as low as 5 percent in Ireland, for example, and the 35 percent tax rate in the United States.
Ms. Arnold said some tax penalties might be expected, but could be reduced by doing some of the buying and selling overseas.
“The experts that we’ve spoken to have very definitely said you can use offshore cash to buy offshore assets, and Pfizer and Wyeth both have very significant offshore subsidiaries that they place cash in,” Ms. Arnold said. For example, she said, “Pfizer Ireland can use its cash to buy Wyeth Ireland or Wyeth Singapore.”
Wyeth, with sales of about $23 billion for the 12 months that ended Sept. 30, has about $2.7 billion in cash and liquid assets, according to David S. Moskowitz, an analyst at Caris & Company, an investment bank.
Pfizer was advised by Goldman, JPMorgan and Barclays; Wyeth was advised by Morgan Stanley and Evercore Partners.
Erik Gordon, a professor at the Ross School of Business at the University of Michigan who follows biomedical industries, said Pfizer and Wyeth were a great fit that made the deal creditworthy.
First, because Pfizer has so much cash, the deal does not have to be highly leveraged with debt, Mr. Gordon said. Second, the two companies have enough overlap that they can achieve considerable saving through consolidating duplicate operations and cutting costs. And finally, parts of a combined operation could be spun off to raise money.
Mr. Gordon pointed to the animal health businesses of both companies — which, considered together, accounted for $2.8 billion in revenue and about $600 million in profit in the first nine months of 2008.
“They could sell that business for billions of dollars to either pay down the debt or service the debt,” he said. In addition, he said Pfizer could resell Wyeth’s consumer products business. He added: “This deal is the rare thing. This’ll be the only money investment bankers make in a while.”