Shire has received a fourth bid of 4700p per share from Japan’s Takeda, a whopping 59% premium over the undisturbed share price on 26 March. Shire already rejected a third bid of 4650p (“significantly undervalued”), and the shares still trade 17.5% below the latest offer price. Will Takeda go even higher to get Shire to say yes? Is £50/69% premium possible?

Specialty pharmaceutical company Shire may be up over 30% this month, as the story developed, but they are still 7% back from yesterday’s 4200p highs, still 2.5% in the red for today, and well below the latest official offer of 4700p. For two reasons.

Firstly, US group Allergan – mooted as another suitor– teased us yesterday by saying it was interested, giving the shares a second wind, only to declare this morning that it wasn’t planning on making an offer, sending the shares back south. Hopes of a bidding war were dashed. There may be other suitors, but they remain silent. Too late to get involved?

Secondly, Takeda’s offer didn’t include enough cash (1775p/38%) which meant significant exposure (2875p/62%) for Shire shareholders the value of shares in a new combined group. After all these shares could be worth significantly less by the time the deal closes and Shire shareholders take ownership of their approximately 51% stake. Note Takeda shares closed at 14-month lows overnight as investors priced in the risk of the company taking on even more debt (to pay Shire more cash) as well as having their ownership diluted (to pay Shire with new shares).

So Shire’s rejection and Allergan’s disappearance put the ball back in Takeda’s court, and it has duly responded, with a fourth improved bid, albeit just 1% better than bid #3. However, in response to an unappealing drop in its own own share price it has reduced the share component of the deal and boosted the cash component in return, from a rejected 62%/38% split to a more favourable 55%/45%. The bid itself may only be 1% higher, but the latest split means 18% more cash and 10% less shares. Which is a better deal for Shire. After all, cash is king. But is it enough?

Going back to 2014, when US group AbbVie was trying to takeover Shire, it offered a more attractive cash/shares mix, opening proceedings with an offer of 4611p of which 44% cash (2044p) and the balance in new shares. Discussions culminated in a final offer of 5248p of which 46.5% cash (2444p; +20%). And although the deal collapsed after political intervention (amid claims of AbbVie only wanting access to Shire in order to pay less tax via Ireland/Europe) shareholders still have these more attractive figures (total offer, cash offer and cash component) in their minds.

Of interest to us yesterday was Takeda’s statement that it would “remain disciplined with respect to terms of any offer” and that it “intends to maintain well-established dividend policy and investment grade credit rating”. The former suggested, after three bids, that it might not be prepared to go much higher (a 50% premium to the undisturbed late-March share price was already hefty); the latter suggested it might not prepared to load up on debt and risk its balance sheet and credit rating, especially with Moody’s questioning its ability to finance a deal with already stretched finances following multiple acquisitions.

Shire is almost certainly angling for a bigger cash component at the very least, if not a higher bid. 4700p, of which 2100p cash, technically ticks both boxes. However, for the moment, neither the 50p increase nor higher cash component are doing much for Shire’s share price. Don’t forget that AbbVie upped its bid for Shire several times in summer 2014, raising the cash component by 20%, as well as the overall offer, which ended up 14% higher. As it stands, Takeda’s 4^th bid represents just a 7% improvement since discussions began, however the cash element has been improved by 31% (from £16 to £21). But as we asked earlier, is this even enough?

We had wondered whether Takeda wouldn’t budge on its £46.50 offer (rather close to AbbVie’s first approach, n’est ce pas?). And an ‘improvement’ to 4700p is nothing much to shout about. But we had envisaged them focusing on improving the 37% cash component, which it duly has, and Shire shareholders are sure to be more receptive to. After all, having been promised £24.44 by AbbVie 3½  years ago, why wouldn’t SHP shareholders hold out for something similar again?

The problem is that £24.44 would equate to over 52% of Takeda’s latest 4700p offer, which its balance sheet might not be able to cope with. We’re closer, but perhaps not quite there. Watch this space. The story may have legs into next week and beyond. Especially if anyone else gets involved, or Takeda dares go even higher. There is much to think about this weekend, both those already involved and those still looking to do so.

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Mike van Dulken, Head of Research, 20 April 2018