Pfizer, Warner ponder deal
Reports say Pfizer raised bid; prior American Home deal could block buyout
NEW YORK (CNNfn) - Warner-Lambert Co. has tentatively agreed to an estimated $85 billion buyout by Pfizer Inc. - but the deal still needs the blessing of Warner's existing merger partner, American Home Products Corp., according to published reports.|
The reports by The Wall Street Journal and other media, citing unidentified sources familiar with the talks, said Pfizer (PFE: Research, Estimates) is expected to offer 2.75 of its shares for each share of Warner-Lambert (WLA: Research, Estimates), valuing Warner shares at about $99 apiece. That's about 10 percent higher than Pfizer's earlier offer of 2.5 shares, but not as high as the three shares Warner-Lambert reportedly had been seeking.
For weeks, Wall Street has expected that Pfizer, the second largest U.S. drug company, ultimately would prevail in the three-month-old takeover fight for Warner-Lambert, one of the world's fastest growing drug companies and maker of blockbuster cholesterol treatment Lipitor. Pfizer's improved bid likely will result in a done deal, analysts said.
"I think it will be the icebreaker," said Viren Mehta, of Mehta Partners. "This can get things done."
Still at issue, however, is how to placate American Home Products (AHP: Research, Estimates), which signed a $56 billion "merger of equals" deal with Warner-Lambert in early November. Under the terms of their deal, American Home stands to receive a $1.8 billion break-up fee if Warner-Lambert walks away.
American Home also may be able to prevent Pfizer from using a favorable accounting treatment for the Warner-Lambert acquisition, which would cut into Pfizer's earnings.
All three companies involved have declined comment about a possible deal. Warner-Lambert spokesman Jason Ford reiterated Thursday that the Morris Plains, N.J.-based company was engaged in merger discussions with New York-based Pfizer, but would not discuss the content of the talks.
A spokesman for Madison, N.J.-based American Home, Lowell Weiner, also declined comment on the Pfizer-Warner negotiations, but said, "We've got a contract that says we're entitled to certain provisions, and we'll see what happens there."
A combination of Pfizer and Warner-Lambert would create the world's second-largest drug maker, after the proposed merger of Britain's Glaxo Wellcome PLC and SmithKline Beecham PLC. The fragmented industry has been undergoing a rush to consolidate, as research and development costs climb higher and competition intensifies.
The new company's product line would include male impotence remedy Viagra, Pfizer's best-known medication, and Lipitor, which is made by Warner-Lambert and co-marketed with Pfizer. Other drugs include blood pressure medication Norvasc, the antidepressant Zoloft, and consumer products such as Certs mints, Schick razors, Sudafed decongestant and Listerine mouthwash.
Such a merger would create "quite a mega-company," said Jeffrey Chaffkin, pharmaceuticals analyst at Paine Webber. "It's over $30 billion in sales. Probably in the next two or three years it will become the world's largest pharmaceutical company and it'll probably be the fastest growing, probably over 20 percent a year."
For Pfizer, the acquisition would help boost its drug development program, which analysts say is among the industry's weakest.
"One of the issues have been with Pfizer is the pipeline looks a little light in the near term, but when you have a drug like Lipitor ... adding a billion dollars a year in revenue, you can buy some time doing that, so the near-term is great," Chaffkin said.
In afternoon trading, Warner-Lambert shares slipped 2 to 93-1/2. Pfizer stock also edged down, losing 3/16 to 35-13/16, but shares in American Home pushed up 1-1/8 to 47-1/4.
Is the end in sight?
The takeover fight began Nov. 4, after American Home, the No. 5 U.S. drug company, and seventh-largest Warner-Lambert announced their friendly, all-stock "merger of equals" deal, then worth about $72 billion. Hours later, Pfizer announced a surprise $82 billion bid, trumping American Home.
Since then, the gap between the two offers has expanded to more than $20 billion because of American Home's falling stock price, prompting Warner-Lambert shareholders to urge the company to consider Pfizer's higher bid.
Warner-Lambert grudgingly agreed Jan. 13 to open talks with Pfizer, as well as with other potential merger partners.
The company entered negotiations with consumer products maker Procter & Gamble (PG: Research, Estimates) for a possible three-way deal involving American Home. But Procter & Gamble was forced to call off negotiations after its stockholders gave a thumbs-down to the proposal by selling off their shares en masse.
Meanwhile, Warner-Lambert and Pfizer are scheduled to go to court Feb. 14 to fight for control of Lipitor, the drug the companies jointly market. A merger deal announced before then would likely make the Delaware court case moot, and both companies seem to want to avoid a high-stakes legal battle.
If American Home's deal falls through, it would represent the company's third failed merger attempt in two years. It would also open the door for other potential bidders to pursue the company. Industry analysts say Switzerland's Novartis is seen as one of the most likely potential suitors, as well as Pharmacia Corp., the new company to be created by the merger of Pharmacia & Upjohn (PNU: Research, Estimates) and Monsanto Co. (MTC: Research, Estimates)
American Home, maker of the best-selling female hormone replacement drug Premarin, the painkiller Advil and other consumer products, has been plagued by continuing litigation over the "fen-phen" diet drug combination.
Last year, the company announced a multibillion-dollar settlement with former users of the diet cocktail, which has been linked to heart valve problems. The settlement is awaiting a judge's approval, and the company still faces many individual plaintiffs' suits.