It is rumored that Pfizer will strike a US$ 101 bn. deal for acquiring AstraZeneca. AstraZeneca’s market capitalization prior to these rumors (17.04.2014) was US$ 80 bn. If these rumours are true it means that Pfizer is offering 25% premium over the market capitalization of AstraZeneca. Is this a fair price?
Normally, the price offered for acquiring 100% of a Company’s ownership should include: the current market value of equity of the target, the control premium over and above the market value of equity and a part of the present value of the expected synergies that will benefit the acquirer in the future.
A very rough Discounted Cash Flow model to estimate AstraZeneca’s market value of equity is presented in the Figure 1. According to various sources (including the Financial Times) AstraZeneca’s revenues will decline in the future as a result of major patent expirations including that of Nexium, Symbicort and Crestor during the period 2014 – 2016. By assuming a Compound Annual Growth Rate (CAGR) of -1% and a stable EBIT margin the free cash flow to the firm has been estimated.
Additional assumptions include:
Current Assets / Sales: Constant (equal to 2013 value)
Cash / Sales: Constant (equal to 2013 value)
Current liabilities / Sales: Constant (equal to 2013 value)
Depreciation & Amortisation (D&A): Constant (equal to 2013 value)
Capital Expenditure (CAPEX): Constant (equal to 2013 value)
Disposals/Purchases: 0 and Constant
Terminal Value: replacement CAPEX (i.e. CAPEX = D&A, capital investments will be used to offset the negative effect of D&A on Assets)
As a next step the discount rate (WACC) is calculated by estimating the cost of equity (using the Capital Asset Pricing Model) and the cost of debt defined as interest expense over total debt (Figure 2)
The market value of equity is the sum of the discounted free cash flows and the discounted terminal value. This is presented clearly in Figure 3.
The amount estimated through DCF incorporates already the control premium but excludes expected value gained from synergies for the acquirer. Based on the analysis presented above the market value of AstraZeneca is US$ 101 bn., exactly the amount Pfizer is offering according to rumors. The price is right. But will AstraZeneca accept such deal?