Shire shakes hands on £46bn Takeda takeover offer

Shire directors have agreed a takeover offer from Takeda Pharmaceutical in a mix of cash and shares that values the FTSE 100 biotech at roughly £46bn, after the Japanese company set out its case for deleveraging quickly and extracting sizeable 'synergies'.

Shareholders of the Dublin-based company will be entitled to receive $30.33 cash per share plus either 0.839 new Takeda shares or 1.678 Takeda American Depositary Receipts. The deal, which will see Shire shareholders own 50% of the combined group, had been valued at £49 per share based on Takeda's share price on 23 April but with a 14% drop since the start of April, the latest closing price of ¥4,535 has since fallen to give a value of £48.17 per share.

A fortnight ago, Shire's board said it would be willing to recommend the deal, subject to certain conditions, including completion of a confirmatory due diligence by Takeda.

On Tuesday, Takeda also stated that following the acquisition it intends to “de-lever quickly”, reassuring that it plans to keep paying a dividend and maintain its investment-grade rating by de-leveraging to a target net debt to EBITDA ratio of 2.0x or less in three to five years, even before making asset sales and/or issuing further equity. The Japanese company also confirmed that up to three Shire directors will join the Takeda board after completion of the deal.

Furthermore, as well as stating the obvious that the acquisition of Shire would be significantly accretive to earnings from the first full fiscal year following completion, Takeda said it expected the deal to provide a return on invested capital above Takeda's cost of capital over the same period with annual pre-tax cost synergies of $1.4bn by the end of the third fiscal year.

As a result, both companies' directors intend to unanimously recommend that their shareholders vote in favour of the takeover at to-be-arranged general meetings.

Shire chair Susan Kilsby said: "We firmly believe that this combination recognizes the strong growth potential of our leading products and innovative pipeline and is in the best interests of our shareholders, our patients and the communities we serve."

Chief executive Flemming Ornskov added that Shire's portfolio and pipeline will ensure the combined group "is in the best interests of shareholders and offers an opportunity to improve the lives of even more patients globally with rare and highly specialised conditions".

Christophe Weber, CEO of Takeda, said: "Since its inception, Takeda has transformed into an agile, R&D-driven global pharmaceutical company that is well-positioned to deliver innovative and transformative care to patients around the world. Shire's highly complementary product portfolio and pipeline, as well as experienced employees, will accelerate our transformation for a stronger Takeda.

"Together, we will be a leader in providing targeted treatments in gastroenterology, neuroscience, oncology, rare diseases and plasma-derived therapies. We are looking forward to the benefits this combination will bring to patients worldwide, the opportunities it will bring for our employees and the returns it will deliver for our shareholders."

Shire shares, which in recent weeks have seemed to reflect little investor enthusiasm for the deal, popped up 5% to 4,041.5p on Tuesday morning.

Analysts at RBC Capital Markets said they believed Tuesday's release "did alleviate some of the concerns surrounding the transaction", most notably Takeda's reassurance that it could de-lever to under 2.0x before asset sales and/or equity rounds.

"Takeda management also noted that its dividend would remain intact, which may have been a concern for some investors." That being said, RBC still anticipate the deal spread to remain wider than normal given the complexity of the transaction requiring approval in various geographies, the question of Takeda's ability to realise synergies and the 2019 deal closing date.

Shore Capital said: "While we acknowledge the consideration as including the part receipt of Takeda equity, given the absence of predictable catalysts over the next 12 months to close the fundamental valuation gap in our view, we see the current proposed offer as offering reasonable value to shareholders over this time frame."

Addressing market concerns that large Takeda shareholders are rebelling against management’s acquisition ambitions and voting with their feet, potentially intimating a threat to any vote to approve the deal, analysts at Olivetree said they saw "no evidence" of a wide-ranging shareholder rebellion.

"The data doesn’t support this...Outside of one holder, there has been very little activity at all amongst the large holders. In fact, this group has actually been a small net buyer, there are very few sellers indeed."

While someone is selling the stock, an institutional group representing nearly 50% of Takeda has remained loyal and will be the investing community that Takeda "will most likely rely on to carry a shareholder vote", says Olivetree. "Even if we model a 66% voting hurdle, modelling a turnout of 75% (last year’s was c73%) sees this close to being cleared with just the support of this group."

In fact, Olivetree says the bigger risk introduced by this performance is the erosion of value to Shire holders: "if one vote is potentially threatened, it could be Shire shareholders deciding the headline offer isn’t sufficient".