Shire goes public with Baxalta combination proposal

The deal, which Shire says would create "the global leader in rare diseases," has a total enterprise value of $33.9 billion

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DUBLIN—Shire plc has gone public with a proposal to combine with Baxalta Incorporated, the spinoff of Baxter International Inc.'s biopharmaceuticals business, which officially launched as of July 1. The initial private proposal was made on July 10 to unite the companies in an all-stock transaction under which Baxalta stockholders would receive 0.1687 Shire ADRs for each Baxalta share, an implied value of $45.23 per Baxalta share and a 36-percent premium over Baxalta's share price as of August 3, the day before the deal went public. If the deal went through, Baxalta shareholders would own roughly 37 percent of the combined entity. Immediately after the transaction closed, Shire would then begin a share buy-back program to repurchase, within two years, up to 13 percent of the combined post-transaction outstanding shares, which would enhance the deal's earnings accretion. Susan Kilsby, chairman of Shire's board of directors, said in a press release that the board unanimously supports the proposed transaction.
Shire noted in the press release that the combined company would be “the global leader in rare diseases with multiple billion-dollar franchises in high-value therapeutic areas with substantial barriers to entry.” In addition, the combined entity would see more than 30 new product launches with an estimated $5 billion incremental sales potential by 2020, according to Shire.
“We believe the proposed combination of Shire and Baxalta would be strategically and financially attractive for both of our companies, accelerating our respective growth ambitions and creating the leading global biotech company in rare diseases,” Flemming Ornskov, CEO of Shire, said in a press release. “The combined entity would have the opportunity to create significant shareholder value in one of the most attractive and fastest-growing segments in healthcare. Together, the companies would be projected to deliver $20 billion in product sales by 2020, with the financial and operational firepower to fuel further innovation and growth in rare diseases. 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.”
In a letter to Dr. Ludwig N. Hantson, president and CEO of Baxalta, Ornskov commented that the proposal offers a variety of benefits, including “Significantly accelerating the value and mitigating the risk of Baxalta’s standalone strategy while providing a substantial immediate premium to Baxalta’s current share price and participation in future upside; strong expected operating synergies as well as benefits from our tax structure to drive meaningful earnings accretion and provide an enhanced growth profile relative to the standalone Baxalta strategy; and a stronger balance sheet that would provide financial flexibility and the ability to launch a sizable share buy-back program to enhance the capital structure and further improve the per share earnings profile of the combined company.”
In response to Shire's announcement, Baxalta issued a press release confirmed receipt of the proposal. In it, the company noted it had received the same proposal privately in July, and that its board and financial and legal advisors “unanimously determined that it is not in the best interests of Baxalta or its shareholders.”
In a letter to Ornskov, Hantson elaborated on the dismissal of the proposal, saying that “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 and other important factors.”
Those other factors include a belief that given the newness of the company, “our stock has not yet achieved a price level that appropriately reflects the company’s value and prospects,” and as such, “a transaction at the exchange ratio you proposed significantly understates Baxalta’s true value.” Additionally, Hantson said the combination would not be strategically complementary or generate “substantial operational or revenue synergies,” adding that “a transaction at this time would be severely disruptive to our young organization and the implementation of a wide variety of critical commercial, R&D, and operational initiatives, and thus carries with it significant risks for our shareholders.”

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