Baxalta (NYSE:BXLT) was recently spun-off from Baxter International (NYSE:BAX) on July 1st, 2015. The company has 16,000 employees and around $6 billion in expected revenues.
Baxalta is expected to have around $2.15 in earnings-per-share in its first full fiscal year. The company has traded around $32 a share since the spin-off. This translates to a price-to-earnings ratio of just under 15.
The typical biopharmaceutical stock trades for significantly higher multiples. Many of the company’s peers trade for price-to-earnings multiples well over 20.
Baxalta appeared significantly undervalued. The stock inherited a long dividend history from Baxter and management confirmed it would continue making the dividend a priority. Baxalta’s combination of value, solid growth prospects, and continued dividend payments made the stock a favorite of the Sure Dividend system.
Baxalta was the 2nd highest ranked stock in the July 2015 Sure Dividend newsletter. On July 5th the newsletter had this to say about Baxalta:
“Baxalta’s high expected total returns and competitive advantage should give the company a P/E ratio above the S&P 500’s. Fortunately for shareholders, Baxalta’s P/E ratio is still low at around 13.3. The company’s P/E ratio is being suppressed due to selling from the recent spin-off. Now is an excellent time to buy into this high quality pharmaceutical business, while the P/E ratio is still low.”
It was an excellent time to buy into Baxalta.
Yesterday morning, Shire Plc (LONDON:SHP) announced they had offered to acquire Baxalta for $45.23 a share on July 10th. Baxalta’s management did not accept the offer. At a price of $45.23 a share, Baxalta would have a price-to-earnings ratio of 21, which is closer to its peer average and around fair value for a high quality dividend growth stock.
Obviously, Shire would not offer more money than it felt Baxalta was worth. Shire’s announcement confirms Baxalta’s undervalued status.
News of the potential acquisition pushed Baxalta’s share price higher. The company’s stock price surged over 12% as investors take notice of Baxalta’s potential and factor in the possibility the stock could soon be acquired.
Reason for Shire’s Announcement
Shire did not announce its acquisition plans because it wants to push Baxalta’s share price higher. Rather, the company is attempting to put pressure on Baxalta’s management to accept an offer.
Shire’s press release stated that “Baxalta has declined to engage in substantive discussions regarding the proposal”.
Shire is attempting to force Baxalta’s hand into negotiating to sell the company. It makes management look less-than-stellar when they refuse to engage in negotiations to sell a business – especially when the sale would be accretive to Baxalta shareholders.
The altruistic reason Baxalta’s management would not sell is that they feel the offer did not reflect fair value. If this were the case, one would expect Baxalta’s management to counter-offer. It appears the company did not counter offer in any meaningful way.
The other reason Baxalta’s management would refuse to negotiate to sell the company is they are looking to reap the rewards of running the business. If the business were acquired, Baxalta’s management could potentially be unemployed. It is therefore in management’s best interest to not sell the new company. This is a case were management appears to be acting in their own best interests rather than in the best interests of shareholders.
Baxalta’s Response
Yesterday afternoon, Baxalta’s management posted a response letter to Shire. Some of the more important quotes are below:
“During our meeting this week, the Board unanimously concluded that it is not prepared to engage with Shire in a discussion about a combination of our companies based on the value you indicated in your proposal”
“A transaction at the exchange ratio you proposed significantly understates Baxalta’s true value.”
"Our board is mindful of its fiduciary obligations to Baxalta’s shareholders, and we are confident in our standalone plan and our ability to generate significant shareholder value based on that plan. Baxalta’s platform is well positioned to generate substantial value for our shareholders and proceeding with a transaction at this time presents a significant and real risk to that value creation. Our Board has evaluated your proposal in this context and concluded that it is not a basis for further discussions.”
Baxalta’s response is very clear. The company is not interested in being acquired as it feels it can generate more value for shareholders as a stand alone business.
One important note that stands out is that Baxalta’s management only met this week to discuss the deal – even though it was offered on July 10th, 2015. This shows the company was not interested in exploring the deal from the beginning, and may have only met to discuss due to pressure from Shire.
I too believe that Baxalta is undervalued. The company’s management should explore selling the business for a higher value, but should not disregard Shire’s bid for the company entirely. Certainly there is some price that Baxalta’s management feels is fair value for the company.
Baxalta’s CEO
Baxalta’s CEO is Ludwig Hantson, Ph.D. His bio from the company’s executive officers page is shown below:
“Ludwig N. Hantson, Ph.D., is President and Chief Executive Officer of Baxalta Incorporated and also serves on the company’s Board of Directors. Prior to Baxalta’s separation from Baxter in July 2015, he was Corporate Vice President and President, Baxter BioScience, having served in that capacity since October 2010. Ludwig joined Baxter in May 2010 as Corporate Vice President and President, International. From 2001 to May 2010, Dr. Hantson held various positions at Novartis Pharmaceuticals Corporation, the last of which was Chief Executive Officer, Pharma North America. Prior to Novartis, Dr. Hantson spent 13 years with Johnson & Johnson (NYSE:JNJ) in roles of increasing responsibility in marketing and clinical research and development.”
Hantson was CEO of U.S. Pharmaceuticals for Novartis from April 2008 through April 2010. Baxter poached him from Novartis in April of 2010 to head up the company’s international division. Hantson was quickly moved off of the international division to the BioScience division.
This is the first time Hantson has been the top CEO of a business. I do not known Dr. Hantson, but it appears he is not yet ready to let go of the reins in his new positions. This is understandable, given he has held the job for just over a month. Hantson (assuming it was he who Shire contacted) was contacted just 9-days after becoming the CEO to sell the business. I completely understand not wanting to sell so quickly, but a CEO’s job is to do what is in the best interest of the shareholders, not what is in his best interest.
Expect Corporate Drama Ahead
It is possible that Baxalta’s management could be attempting to significantly drive up Shire’s asking price by remaining aloof to the deal.
If this is the case, we will likely see renewed engagement between the two companies’ managements regarding an acquisitions.
A hostile takeover of Baxalta by Shire is not out of the question, either. Shire’s management did say that:
“it is our strong preference to immediately enter into a negotiated transaction to explore the full potential of the proposed combination and finalize the terms of an agreement.”
This signals the company would much rather engage in a peaceful acquisition than a hostile acquisition.
Whatever the case is, the Shire announcement bodes well for Baxalta shareholders. The announcement sheds light onto the undervalued company. If an acquisition is completed, Baxalta shareholders will see even higher gains.
If an acquisition does not occur, the company still has received a boost and will likely trend toward a price-to-earnings multiple around 20 over time, which will result in rising share prices. Baxalta’s management is also recently announced a $1 billion share repurchase plan, showing it strongly believes the company is undervalued.