Bayer AG (BAYN), the largest German drugmaker, is weighing a bid for Pfizer Inc.’s (PFE) animal-health unit and discussing how to raise funding with banks, said people with knowledge of the plans.
Bayer is in the early stages of considering a bid and may ultimately decide against making one, said the people, who declined to be identified because the process is confidential. The Pfizer veterinary business may fetch $14 billion to $18 billion in a sale, according to research firm Leerink Swann LLC.
Bidding for the Pfizer unit would be Bayer’s second major attempt in three years to bulk up its veterinary-products operation. The Leverkusen, Germany-based company offered 6 billion euros ($7.9 billion) to 7 billion euros in 2009 for Schering-Plough Corp.’s Intervet unit, two people with knowledge of the situation said at the time. Bayer was unable to do that deal after the sale was scrapped by the owner.
Pfizer has been considering a full or partial sale, or a spinoff of the unit, since July. The New York-based company plans to make a decision this year, with a potential transaction to be carried out between July 2012 and July 2013, Pfizer said Jan. 31. Pfizer is likely to pursue a spinoff, as that would be more tax-efficient than a sale, a person familiar with its plans said.
If Bayer made a bid before a spinoff, it might be asked to cover the tax liabilities, which could cost Pfizer as much as $5 billion, people with knowledge of the situation said. On the other hand, waiting to bid until after a spinoff could make the animal-health unit more expensive, if it performs better than expected or if other bidders express interest, they said.
Christian Hartel, a Bayer spokesman, and Beth Calitri, a Novartis spokeswoman, declined to comment on market speculation. A Pfizer spokeswoman said the company had not yet decided on a spinoff or sale.
“Our decision about strategic options will be driven by value creation for the business and delivering the best after- tax value for our shareholders,” Joan Campion, a spokeswoman for Pfizer, said via e-mail.
‘A Great Business’
Bayer wants to strengthen its health-care unit, Chief Executive Officer Marijn Dekkers said Feb. 28 when the company reported fourth-quarter earnings. “Pfizer animal health is a great business,” Dekkers said. “I don’t want to comment on our interest.”
Pfizer is unlikely to hold talks over a sale of the unit with any bidder prior to its decision on a spinoff because such negotiations would undermine the tax benefits of the spinoff. They could also delay a subsequent deal by at least a year under U.S. law, according to Robert Willens, a tax-accounting analyst in New York who advises investors.
“There’s almost no chance two companies in that situation would engage in talks before a spinoff,” Willens said. “As long as there has been no agreement nor substantial negotiations, the acquisition can occur without jeopardizing the tax-free nature of the spinoff.”
Pfizer is shedding its animal health and nutrition businesses as part of Chief Executive Officer Ian Read’s plan to focus on developing new prescription drugs after losing patent protection for Lipitor, a cholesterol pill and the world’s best- selling medicine. Tax-free spinoffs have the potential to obtain the greatest value for investors.
Pfizer’s veterinary business, the biggest in the industry, had revenue of $4.18 billion last year, up 17 percent from 2010. Novartis AG, Europe’s second-biggest pharmaceutical company, may also be interested in the business, people familiar said.
Bayer Animal Health’s sales rose 5.9 percent last year to 1.19 billion euros, making it the fifth-largest, according to data compiled by Bloomberg News. Sales in Bayer’s drug business declined 0.1 percent last year.
Bayer rose 0.6 percent to 53.33 euros in Frankfurt, giving the company a market value of 44 billion euros.
The German company has the means to finance a “significant” acquisition using debt, equity and its portfolio assets, Chief Financial Officer Werner Baumann said in an interview on Feb. 28.
Bayer may consider a sale of its plastics operation known as Bayer MaterialScience to finance major bids such as an offer for the Pfizer unit and to protect its credit rating, two of the people said.
Bayer operates three main businesses: Bayer HealthCare, which includes pharmaceuticals, consumer-health products and veterinary drugs; Bayer MaterialScience; and an agricultural- chemical unit called Bayer CropScience.
The animal-health unit manufactures products in Kiel, Germany, and Shawnee, Kansas. The company’s brands include the Advantage flea- and tick-control products for dogs, and Baytril to control infectious diseases in livestock and pets.
Dekkers said in September 2010 that the company needed to decide the future of the animal-health unit in 12 to 18 months. The business is “relatively small” compared with its competitors, he said at the time.
Jean-Luc Lowinski, the head of Bayer Animal Health, is leaving to join Paris-based drugmaker Sanofi as senior vice president for Asia, Sanofi said March 2.
By Aaron Kirchfeld, Jeffrey McCracken and Jacqueline Simmons
Courtesy of Bloomberg News