Pfizer, W-L strike deal
$90B buy will create world's No. 2 drug maker; AHP gets $1.8B break-up fee
NEW YORK (CNNfn) - Pfizer Inc. agreed Monday to pay about $90 billion in stock for Warner-Lambert Co., creating the world's second-largest drug company and ending its turbulent three-month pursuit of its fast-growing competitor.|
The new company will control drugs including the blockbuster cholesterol-lowering agent Lipitor and male impotence treatment Viagra, as well as consumer products such as Schick razors, Listerine mouthwash, Sudafed cold remedy and Visine eye drops. The combination will have annual revenue of about $28 billion, and will spend an estimated $4.7 billion on research and development this year.
Lipitor: The drug behind the deal (click here)
Wall Street has anticipated the deal for weeks, after Morris Plains, N.J.-based Warner-Lambert (WLA: Research, Estimates) -- which already had signed a "merger of equals" pact with American Home Products Corp. (AHP: Research, Estimates) of Madison, N.J. -- grudgingly agreed to consider Pfizer's unsolicited buyout offer. After on-again, off-again talks and a flurry of lawsuits by both sides, Pfizer (PFE: Research, Estimates) sweetened its bid by about 10 percent, and American Home agreed to drop its merger arrangement in exchange for a $1.8 billion break-up fee - one of the biggest in corporate history.
"We are extremely pleased to be merging with Warner-Lambert, a company that like Pfizer has long been an innovator in our industry," Pfizer CEO William Steere said in a teleconference with pharmaceutical industry analysts.
Steere will head the new company, but Warner-Lambert Chairman and CEO Lodewijk J.R. de Vink made a "personal decision" not to remain with the new firm after the deal closes. De Vink was slated to head the combined company formed by Warner-Lambert and American Home.
De Vink said that the deal comes after "some tough negotiations" but that Warner-Lambert succeeded in its desire to obtain the maximum value for its shareholders.
"I am fully confident that we have achieved that," he said.
The two companies reportedly struck a deal last week, but American Home stood in the way. But in a key move for Pfizer, American Home now has agreed to give up its claim to Warner-Lambert stock options, clearing the way for Pfizer to use pooling-of-interest, rather than purchase accounting, for the combination. If federal regulators approve the accounting plan, that will let the enlarged company avoid multimillion-dollar charges for goodwill associated with the acquisition.
Under the deal, Pfizer will exchange 2.75 of its common shares for each Warner-Lambert share. Based on Pfizer's closing price of $35.75 Friday, that values Warner-Lambert at $98.31 per share, a modest 4 percent premium over Warner's closing price Friday but a 34 percent premium over the stock's average closing price in October, before Pfizer launched its bidding war.
The deal has no break-up fee or collar arrangement on potential fluctuations of either company's stock price.
Shares in all three companies moved higher early Monday. Warner-Lambert stock gained 2-9/16 to 97-1/8, after hitting a 52-week high of 97-1/2 earlier in the session. Pfizer shares gained 15/16 to 36-11/16.
American Home stock jumped 2-15/16 to 48-7/16. The collapse of its deal marks its third failed merger pact in two years, but the massive break-up fee it will receive could help the company pay for a multibillion dollar legal settlement over the "fen-phen" diet drug combination. The company also announced Monday that it is in the process of divesting its struggling Cyanamid agricultural products unit.
Now that its deal with Warner-Lambert is officially dead, the company also could be the target of buyout offers from other drug companies, industry analysts say.
The Pfizer/Warner-Lambert combination will create the world's No. 2 pharmaceutical company, after the merged company created by the planned combination of Britain's SmithKline Beecham and Glaxo Wellcome. Pfizer is currently the second-biggest U.S. drug maker, while Warner-Lambert ranks seventh. The new company will displace Merck & Co. (MRK: Research, Estimates) as the largest U.S. drug company.
Company officials said the merger would contribute to earnings during its first full year of operations, with compounded annual revenue expected to be 13 percent through 2002 and earnings growth expected to be 25 percent in that period.
Pfizer president and chief operating officer, Dr. Henry McKinnell, told CNNfn that the deal will bring together "the two fastest growing companies in the industry," and that Pfizer will use Warner-Lambert's consumer products unit as a platform for bringing more prescription drugs over the counter.
Pfizer said it hopes to achieve cost savings of $1.5 billion by the end of 2002. The companies said there would be job cuts, but said it was too early to say how many or where the reductions would occur. Pfizer employs about 46,000 people, while Warner-Lambert has about 43,000 workers.
The deal is expected to close by the middle of the year, pending regulatory approval.
Pfizer shareholders will retain a 61 percent stake in the new company while Warner-Lambert shareholders will have 39 percent, and get the right to nominate eight directors to join Pfizer's 15-member board.
A bitter battle
AHP's initial deal with Warner-Lambert, signed Nov. 4, began to unravel quickly. Just hours after they announced their planned $72 billion merger, Pfizer stunned the industry by making an unsolicited bid for Warner-Lambert worth $82 billion. The gap between the two bids has widened over the course of the takeover fight, as AHP's stock price has fallen, bringing the American Home deal down to about $56 billion.
At the heart of the battle has been Warner-Lambert's blockbuster cholesterol drug Lipitor. Pfizer has had a joint marketing agreement for Lipitor since the drug was launched in 1997. The drug had sales of $3.7 billion in 1999 and could be on its way to becoming the world's first $10 billion-a-year medicine.
"I think that's what driving a lot of the pharmaceutical companies now is to expand their pipelines, as well as a number of their blockbuster drugs," said Dr. Kenneth Kaitin, director of the Tufts Center for Drug Development. Studies show that only about three in 10 prescription drugs on the market today recoup the amount spent on R&D, making blockbuster drugs such as Lipitor all the more valuable to pharmaceutical companies, he said.
AHP ponders next move
American Home, the maker of the pain reliever Advil and Premarin female-hormone replacement drugs, now finds itself in play once again.
But the company's biggest problem however is the ongoing fen-phen litigation, said Tom Burnett, president of institutional research firm Merger Insight. The company was forced to withdraw the diet "cocktail" from the market in 1997, after it was linked to heart valve problems and other medical conditions. The company reached a national settlement with plaintiffs last year, setting aside $3.29 billion after-tax in the 1999 third quarter to pay for the settlement, but many individual patient suits remain.
American Home "just has to get its arms around that and make investors in other companies feel comfortable with the liability and the risk," Burnett said. The $1.8 billion break-up fee "will go a long way in helping American Home," he said.
An American Home spokesman told the Reuters news agency that the company planned to use the money to pay off corporate debt unrelated to the fen-phen settlement.
Industry analysts speculate that several potential buyers, including Switzerland's Novartis and Pharmacia Corp. -- the new company to be created by the merger of Pharmacia & Upjohn (PNU: Research, Estimates) and Monsanto Co. (MTC: Research, Estimates) -- may be eyeing American Home.
Pharmaceutical analyst Leonard Yaffe of Banc of America Securities said that American Home has turned a corner, and that the company should find a merger partner soon.
"American Home has an excellent pipeline for a company its size going forward after having had a rather difficult time in the '90s with coming out with significant new drugs," he said. "We feel that they'll be very attractive especially with the announcement today (Monday) that they seek to divest their agricultural division."
Meanwhile, analysts say this latest merger in the pharmaceutical industry likely will not put an end to the consolidation frenzy in the industry.
"We believe that the industry is only at the initial phases of what we think will be a very significant consolidation," said Yaffe. He noted that the industry is still fragmented, with the proposed Glaxo SmithKline combination -- which would be the world's biggest drug company -- accounting for only about 7.5 percent market share of the estimated $300 billion global industry.
The new Pfizer would control about 6.5 percent of the global drug market, followed by AstraZeneca, with about 4.4 percent, according to 1999 data from pharmaceutical research firm IMS Health.
Meanwhile, investors have not reacted well to the combination of Glaxo and SmithKline, which was announced last month, selling off shares in both companies. If investors don't change their minds about the deal, "you could get another interested party looking at SmithKline Beecham," Burnett said.
Another company to watch is consumer-products maker Procter & Gamble Co. (PG: Research, Estimates), which stepped into the fray as a potential "white knight" suitor for both Warner-Lambert and American Home last month, but halted talks after its stock price tumbled amid reports of a potential deal.
Burnett said that P&G is likely to remain interested in making an acquisition in the drug industry to boost its small, pharmaceutical unit.
"There'll be a lot of turmoil; and we're not finished yet," Burnett said.