ABBVIE (ABBV) has been trying to buy a pharmaceutical company since it was spun out of Abbott Labs (ABT) in 2013. There was a close call in the summer last year (2014) when the company was looking to become British in a merger with Shire. After much fanfare, including a comment from the U.S. government about “tax dodging”, the deal broke apart and ABBVIE paid a large breakup penalty. Now they are after Pharmacyclics (PCYC) a leader in the development of biotech advances against cancer. The market has recognized advances Pharmacyclics has made in the field and valued the company at a 31% premium above Fair Value. ABBVIE also carries a premium in the market but, not as rich as their target company. ABBVIE is currently sporting a 9% premium above Fair Value.
Is ABBVIE offering too much at $261/share or is it a good deal?
The deal is 58% cash and 42% ABBVIE stock. The stock portion already has a 9% premium in value which is good for ABBVIE. They are in essence using a premium currency, their stock. If we adjust for the premium of ABBVIE stock, the transaction price comes in at $251/share rather than $261/share. This is better than the offer price premium of 49% but, still well in excess of the current premium the market has attached to the company of 31%. The final premium using our adjustments is 43%. A bit better than 49% but, not good enough. Additionally, part of the deal requires ABBVIE to take on new debt to afford the cash portion. We recognize that interest rates are low but, this adds an additional cost to the transaction. Without the debt costs the current arrangement imposes a 10 percentage points higher premium than the market believes credible. Why does a company pay such a high price for the deal?
Are they desperate to expand at any cost? Did they convince themselves that they can make this work? What do they see that the market is missing? It is certainly possible the market is missing the synergy but, by this large a margin?
At this current price level I would not be interested in adding ABBVIE to my portfolio. There are other healthcare/pharmaceuticals that look more attractive. Be careful if you are considering buying this great advancement in merged companies. Many times the market does not agree with management, and the stock price eventually reflects the true market value after the deal frenzy dust settles.