Deal or no deal? How Pfizer's bid for AstraZeneca could turn out

http://www.theguardian.com/business/2014/may/11/deal-pfizer-bid-astrazeneca-scenarios-tax-advantages

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US drugmaker Pfizer's £60bn takeover approach for British rival AstraZeneca has caused a political storm, and the chances of it achieving a deal hang in the balance. Top British scientists, trade unions, opposition politicians and the Wellcome Trust have dented Pfizer's hopes of success by warning that a takeover could have disastrous consequences for British science.

This week is crucial for Pfizer: its chief executive, Ian Read, will appear before MPs in Westminster to answer questions on the potential takeover. Pfizer is expected to sweeten its cash-and-shares proposal again and increase the cash element to bring AstraZeneca to the negotiating table.

Some big shareholders told AstraZeneca last week that they wanted the board to engage with Pfizer, but two if its top 10 investors – Investor AB of Sweden and Aberdeen Asset Management – have backed the board's rejection of Pfizer's advances.

Here are the five most likely scenarios in one of the most contentious takeover battles to involve a British company in recent years.

1. PFIZER TAKES OVER ASTRAZENECA IN AN AGREED DEAL

Pfizer's preference is for a negotiated deal, which would also be an easier sell politically. Analysts believe Pfizer will have to increase its offer from £50 a share to at least £55 or even £60. But there is a limit to how much cash Pfizer can offer. US rules dictate that if it wants to relocate to Britain for tax purposes, at least 20% of the enlarged company's shares must stay in the hands of AstraZeneca investors.

Pfizer will also have to make stronger commitments on keeping research and development in the UK. For example, the Wellcome Trust has called on the government to ensure that Pfizer does not move AstraZeneca's promising cancer research to the US west coast. So far, Pfizer has pledged to complete AstraZeneca's planned scientific campus in Cambridge and to keep at least 20% of the combined R&D workforce in the UK for a minimum of five years. David Cameron initially welcomed these "robust assurances" but now he wants more. And so do AstraZeneca's shareholders.

2. PFIZER GOES HOSTILE

Under British takeover rules, Pfizer has to put a formal offer on the table by 26 May or it will have to walk away for six months. If the AstraZeneca board refuses to negotiate, the maker of Viagra and Lipitor could take its offer directly to shareholders. Several big investors have indicated that they would be open to a deal at the right price. Deutsche Bank analyst Mark Clark said: "Pfizer has nailed its colours firmly to the mast and it is difficult to envisage it walking away if it can't negotiate an agreed deal."

However, the complexity of this mega-deal, including the tax structure, makes it trickier for Pfizer to go hostile.

3. PFIZER WALKS AWAY

Pfizer wants to shield tens of billions of dollars of overseas earnings from the higher US corporation tax rate and is attracted by other UK tax incentives, such as R&D tax credits, and by AstraZeneca's cancer pipeline. It is under some time pressure to do a deal now. There are moves afoot in the US to make it harder for American companies to relocate overseas in order to avoid taxes.

But New York-based Pfizer was probably not expecting such a political backlash in Britain. Business secretary Vince Cable has declared the government will show "even-handed neutrality" over Pfizer's approach. If the coalition changes its tune and turns hostile towards the takeover, Pfizer may well walk away.

4. ASTRAZENECA FINDS A WHITE KNIGHT OR BECOMES AN ACQUIRER

Sir Andrew Witty, who runs GlaxoSmithKline, Britain's biggest drugmaker, has poured cold water on the idea of a white knight bid for AstraZeneca. He doesn't like mega-mergers, and in any case GSK has enough on its plate, having just announced a major asset swap with Switzerland's Novartis. Analysts at Société Générale have suggested that AstraZeneca could launch a £30bn bid for rival Shire to escape its predator, but chief executive Pascal Soriot is also not keen on big deals.

5. PFIZER SECURES A TAKEOVER BUT WESTMINSTER OR THE EU BLOCKS IT

David Cameron wants Britain to be open to foreign investment, but will find it hard to ignore a growing number of opponents to the takeover within the British science community. Philip Rogers, a corporate transactions lawyer at Clyde & Co, notes that the Enterprise Act contains a "public interest test", which is restricted to issues of national security but could be easily extended to other areas. The size of the merger also means that it is likely to be reviewed by the European commission. Corporate lawyers say the government could ask to intervene in the commission's review in order to "protect legitimate interests" while the commission reviews the impact of the merger on competition.