Some people just won’t take no for an answer. According to Reuters, Shire (SHPG) is getting ready to unveil a higher bid for recent spinoff Baxalta (BXLT), after its unsolicited $30b offer was rejected earlier this year. At the time of the initial offer, the orphan disease focused company had been independent for about roughly two minutes and argued that the offer did not properly capture its value given the market hadn’t had time to learn about the company or its prospects yet. It also wanted more time to execute on its strategy and develop its pipeline. Additionally, some were less than enthusiastic about the deal’s all stock proposal, although it was structured that way in order to maintain the tax effectiveness of Baxalta’s spinoff from Baxter International (BAX).
If a new offer does come down the pike though, it’s unclear where it will come in at, however Reuters thinks the structure will change to include some cash. Barron’s quoted Leerink’s Jason Gerberry who thought a cash & stock offer could work based on talks with an M&A specialist, despite the potential issue due to the recent spinoff:
MEDACorp specialist believes Shire’s ability to use cash comes down to two issues: (1) if there was a strong business rationale for splitting apart Baxter-BXLT and SHPG didn’t negotiate with Baxter pre-spin, then Shire hasn’t created an issue wherein Baxalta can be deemed a “device” for avoiding tax on earnings distribution; (2) if Baxalta gets 30-50% of the deal financed in stock, then continuity of interest requirements are satisfied. Assuming 30-50% of the deal is financed with debt, we forecast Baxalta being 10-20% accretive to non-GAAP earnings.
Additionally, Mr. Gerberry thinks Shire wouldn’t make a proposal if it couldn’t secure an unqualified opinion from a Big 4 firm. One thing that is clear is though is that Shire is very interested and very aggressive in the M&A market. The company recently announced a $5.9b deal for another rare disease company, Dyax (DYAX) and during that M&A call, Shire’s CEO Flemming Ornskov made it very clear that the company could still pursue Baxalta:
Before taking questions, I would like to make a very brief comment on Baxalta. Today’s proposed transaction with Dyax reflects our core strategy of supplementing internal development capabilities with highly strategic M&A focused on our core therapeutic areas. Even with this transaction, we will continue to have the financial firepower to proceed and pursue other value-adding strategic acquisitions, which would include Baxalta.
The plot thickens and negotiations are likely taking place behind closed doors right now. Given Baxalta’s strong takeover defenses, including a poison pill and board structure, it makes more sense for Shire to try and make a deal with a carrot (more money and more cash) instead of a stick (hostile approach). Baxalta’s shares spiked over 10% on the news, but ended up settling down a bit. It’s worth remembering that the initial deal was all stock and Shire’s shares have since declined so it would have to really sweeten the deal just to get back to its ‘original’ rejected valuation. 2015 is already a record one for M&A, but with drama like this, it’s worth remembering it isn’t over yet.
Disclosure: Author holds no position in any stock mentioned.