Why 2 Analysts Are Talking Up a Pfizer-Allergan Merger
The health care sector may have sold off a fair amount since this past summer, but there is some M&A action between giants in the sector that has potential to heat it back up. Pfizer Inc. (NYSE: PFE) and Allergan PLC (NYSE: AGN) are two of the biggest names in the sector that are planning to combine. As a result a couple of key analysts weighed in on these companies.
Merrill Lynch reiterated a Buy rating for Pfizer with a $39 price target, implying upside of 12% from current prices. The reasoning behind this rating was that the company offers compelling valuation, an attractive dividend yield and good pipeline optionality, in the firm’s view. Pipeline progress, launch execution and business development deals are also key drivers.
The firm’s scenario analyses do not capture the longer term strategic value of an inversion, such as the ability to more competitively bid on potential acquisition targets, while maintaining a positive net present value. This could allow Pfizer greater scope for business development, especially on the innovative side of the business, which could further enhance value. Merrill Lynch awaits further updates/details on the progression of the talks in the coming weeks, including potential details on proposed deal structures and anticipated synergies.
In its report, Merrill Lynch said:
Following PFE and AGN both confirming that the two companies are in preliminary friendly discussions regarding a combination (see initial take here), we have built a PFE-AGN merger scenario analysis. Our merger model outlines potential deal scenarios (e.g. all stock deal, varying offer prices for AGN, differing synergies realized) and the resulting upside risk to PFE’s standalone value and potential EPS accretion. We note the inversion component of the deal is essential for it to be attractive for PFE, in our view (PFE has a non-GAAP tax rate of 25% vs. AGN’s of 14%). If we assume an all-stock offer for AGN valued at roughly $155bn ($375/AGN share, a ~20% premium to AGN’s closing price), an 18% pro forma tax rate and 35% operating expense synergies (on AGN pre-deal Op.Ex.), we estimate this would result in 12% EPS accretion by 2019 and $3.5/share implied upside risk to PFE’s DCF value. We continue to view the potential deal as attractive (depending on offer price/Op. Ex and tax synergies) but also note other alternative deals that PFE could do which could create value.
Separately, Argus maintained its Buy rating but raised its price target for Pfizer to $46 from $41, implying upside of 32%. The independent research firm also raised its 2015 EPS estimate to $2.16 from $2.07 and the 2016 estimate to $2.44 from $2.34. The consensus EPS estimates for 2015 and 2016 are $2.16 and $2.36, respectively.
Argus gave its investment thesis as follows:
We are maintaining our BUY rating on Pfizer and boosting our target price to $46 from $41 following the company’s announcement that it is in merger talks with Allergan. In our view, a merger would result in a significant tax reduction and other cost savings for Pfizer, while also strengthening its product pipeline. We believe that a formal deal announcement would send the shares meaningfully higher. We also expect investors to benefit from PFE’s strong share buyback program and dividend yield of about 3.2%.
Shares of Pfizer were last seen trading down nearly 1% at $34.75 Tuesday, with a consensus analyst price target of $40.20 and a 52-week trading range of $28.47 to $36.42.
Allergan shares were trading at $313.06, with a consensus price target of $361.60 and a 52-week range of $237.50 to $340.34.