After a wildly successful IPO that raised over $2 billion, and valued the newly-created company at more than $12 billion, pharmaceutical giant Pfizer Inc. (NYSE:PFE) retains about 80% of the equity in its former animal drugs division Zoetis Inc (NYSE:ZTS).
Although Pfizer has not made any formal announcements of its plans for the remaining stake, it is widely expected to unwind a significant portion of its investment during the coming months. These moves could come in the form of an exchange offer with Pfizer’s current shareholders, a secondary IPO, or targeted sales of stock to institutional investors. The company is expected to offer more clarity on its plans by the end of 2013.
About Pfizer Inc. (NYSE:PFE) and Zoetis Inc (NYSE:ZTS)
New York-based Pfizer Inc. (NYSE:PFE) is a multinational drug company that develops and distributes dozens of proprietary formulas on a global basis. Its portfolio includes many “blockbuster” drugs, including Celebrex, Lipitor, Viagra, and Chantix.
Although the company has faced persistent worries about the impending expiration of many of its most valuable patents, its pipeline appears to be well-stocked, and should provide the company with product support during the coming years. Pfizer Inc. (NYSE:PFE) also develops and markets specialized, small-market products, that treat a variety of rare or congenital disorders and afflictions. These include Prevenar, ReFacto and Zynox. The company employs tens of thousands of employees and earned $9.5 billion on gross 2012 revenue of $59 billion.
Madison, New Jersey-based Zoetis was the animal-drug division of Pfizer Inc. (NYSE:PFE). The company focuses exclusively on developing and marketing vaccines and medications for livestock and household pets, including horses, cattle, dogs, and cats. The company’s signature products include a cattle vaccine known as BoviShield, an anti-parasite drug known as Cydectin, and a anti-infection drugs like Clavamox and Convenia.
The company works with veterinarians, livestock specialists, farmers, and pet owners in North America, Asia, Europe, and South America. The company earned about $455 million in 2012 on revenue of $4.3 billion.
How the deal was structured
Pfizer’s initial spin-off of Zoetis involved the offering of about 86 million shares at $26 apiece. This generated over $2 billion in value for the company, and clearly whetted its appetite for further moves. After the offering, Zoetis’ stock surged more than 30% before closing at a premium of 19% to its offering price.
Pfizer Inc. (NYSE:PFE) continued to hold nearly 415 million non-voting Class B Zoetis shares. Since these can be converted into Class A common shares on a one-to-one basis without prior notice, this stash places Pfizer in an enviable position. Its shareholders could benefit handsomely as a result.
Potential next moves
Market-watchers believe that Pfizer’s most likely next move will involve a partial exchange offer, that enables current Pfizer shareholders to exchange part, or all of their holdings, in the company for shares in Zoetis. Such exchange offers typically take place at a significant discount, and may provide Pfizer shareholders with a significant arbitrage opportunity of anywhere from 10%-30%. However, such an offer remains hypothetical in the absence of a formal announcement.
Of course, Pfizer could also sell a portion of its stake on the open market, or orchestrate a formal secondary offering at a future date. Since a secondary offering might needlessly depress Zoetis’ stock price, a controlled unwinding of Pfizer’s stake appears more likely.
Although this could have a dampening effect on Zoetis short-term performance, it will not materially affect the stock in the long run. Some observers have also raised the notion that Pfizer could choose to maintain an overwhelming stake in the company in order to “steer” it towards deals that could boost its share price or dividend. If this is the case, investors may wish to take a simple buy-and-hold approach to Zoetis.
It is important to note that any plans for an exchange offer or secondary IPO are subject to change. If the broader market takes a significant leg down, Pfizer may well decide to hold off on making any new offerings until conditions improve. Although this would probably be perceived as a disappointment, Pfizer is intentionally keeping its options open in order to avoid creating unreasonable expectations among shareholders.
Competitors and other pending spin-offs
It is no stretch to say that the Zoetis spin-off is a game changer. Now that Pfizer has established a blueprint for successful animal-drug spin-offs, other major pharmaceutical companies are actively considering making partial distributions of their own.
Divisions that have been cited as ripe for such spin-offs include Merck & Co., Inc. (NYSE:MRK)‘s Animal Health, and Sanofi SA (ADR) (NYSE:SNY)‘s Merial. Like Zoetis, both of these divisions have top-selling vaccines and drugs, that are not subject to the strict regulatory hurdles and stringent patent requirements of human medicines.
Merck’s Animal Health business is global and has its own R&D and distribution systems. Sanofi’s Merial used to be owned partially by Merck & Co., Inc. (NYSE:MRK), but in 2009, Sanofi bought out Merck’s stake. Merial is a global company, and recently expanded by purchasing an animal health business in India. Both Merck’s Animal Health and Sanofi’s Merial could easily fetch $1 billion or more in a partial IPO.
Happily, it appears that the market for animal drugs and vaccines is expanding at a rapid clip. As such, it is unlikely that these IPOs would affect Zoetis’ performance to a significant degree.
In sum, Zoetis offers tremendous value for long-term investors who wish to take advantage of its projected growth. At the same time, Pfizer’s stockholders may soon enjoy a short-term arbitrage opportunity in the form of a discounted exchange offer for Zoetis’ shares. In either case, investors would do well to watch both stocks at these levels.
The article Will This Successful Spin-off Mean More Spin-offs in the Industry? originally appeared on Fool.com and is written by Mike Thiessen.
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