Last October, Pfizer (NYSE:PFE) announced that it was reviewing strategic alternatives for its consumer healthcare division that sells over-the-counter products, such as Advil and Centrum vitamins. The drugmaker has three basic options for trying to unlock value from the unit:
- Sell off the unit to some other drugmaker.
- Spinout the division as a separate company through an initial public offering (IPO), selling all or part of its stake in the unit.
- Spinout the division as a separate company and give current Pfizer shareholders shares in the new company.
The buyers are dropping
Last week, GlaxoSmithKline (NYSE:GSK) announced that it wasn’t interested in buying Pfizer’s healthcare division. Shares in the British drugmaker went up 3.5% Friday on a dismal day for most of the rest of Wall Street. Although, the rise probably has more to do with investors being happy with the direction GlaxoSmithKline’s new CEO Emma Walmsley is taking the company than investors expressing an opinion about the attractiveness of Pfizer’s consumer healthcare division.
Earlier in the week, before GlaxoSmithKline made its announcement, Reckitt Benckiser, a British consumer goods company, also said it wasn’t interested in Pfizer’s healthcare unit. And Johnson & Johnson (NYSE:JNJ) dropped out of the race in January.
That doesn’t leave too many potential bidders. Novartis sold its consumer healthcare division to GlaxoSmithKline a few years ago. Bayer bought American Merck‘s consumer healthcare division a few years ago and German Merck KGaA has been trying to unload its own consumer healthcare division.
Nestle, a company often associated with chocolate although it has a wide range of products, was rumored to be a buyer of Merck KGaA’s consumer healthcare division, so perhaps it might be interested in Pfizer’s unit. Bayer could also be an option as a suitor although it might not want to bite off another large purchase with the impending acquisition of Monsanto.
While it would be nice to create a bidding war, companies publicly dropping out of the race likely signals that Pfizer is driving a hard bargain with a minimum price that the dropouts aren’t willing to pay. Perhaps Pfizer will be able to find a suitor, but it doesn’t have to give the unit away for cheap since it has a backup option of spinning out the consumer healthcare division as a separate company.
Picking from the other two
If Pfizer ends up spinning out the unit into a separate company, an IPO, selling some or all of the shares in the new company, would likely be a better choice than simply handing over shares in the new company to current shareholders.
An IPO would generate cash for Pfizer — in the same way that a sale would — that the drugmaker could use to acquire or license additional drugs to boost its pipeline. A full IPO of all the shares might not be possible given the expected size of the resulting company, but Pfizer could remain a shareholder, selling the shares at a later date.
Spinning off the company and handing over the keys to current shareholders is also an option, which seems more shareholder friendly since it would allow shareholders to do what they see fit with the old and new companies. But without the extra cash, it might not result in the best return on investment for current shareholders.
If history is a cue, it could be a combination
A few years ago, Pfizer was left with a similar situation for its animal health division, Zoetis. Pfizer decided to spin out Zoetis in an IPO, but still ended up owning 80% of the company. Rather than selling off the remaining shares, Pfizer gave investors the option of swapping out their Pfizer shares for shares in Zoetis, which ultimately resulted in Pfizer disposing of its remaining shares.
While offering a trade doesn’t result in as much cash for Pfizer, the strategy does lower Pfizer’s share count, which boosts its earnings per share. And since Pfizer has been routinely repurchasing shares over the last few years, it doesn’t really matter if Pfizer does a full IPO and uses the cash for licensing deals or does a stock swap, spends less buying back shares, and then uses that extra cash for licensing deals.
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