Every now and then, it emerges that Shire is to reshape its offer for Baxalta — the American pharmaceuticals group it has been courting since the latter was spun out of Baxter International and floated in the summer — and the Shire share price falls.
The latest report was followed by a 42p slide in the Shire price to £43.78, although I am not sure how seriously the market takes it. The price drops as a deal looks more likely because of concerns that Shire is overpaying for its target, while the market has always had its doubts over the savings and synergies the would-be buyer sees in a purchase.
There is also the belief that by buying an American business with a higher tax rate than Shire enjoys in its native Ireland, the company is making itself less attractive to an eventual takeover from a larger group. After all, it did attract an approach from AbbVie last year. A deal is a long way from certain, but it is a racing certainty that if Shire admits defeat and walks away, its price will rise.
I do not believe that a deal will be forthcoming. Flemming Ornskov, the chief executive, has indicated that he will not wait forever. Baxalta will require a high premium, while the share prices of both companies have been savaged by the rout in the sector, partly from fears that American authorities will crack down on drug prices. Shire’s initial approach is dead in the water, an all-shares offer that is worth about four dollars below Baxalta’s present share price. It needs the deal to lessen its dependence on its Vyvanse product for attention deficit hyperactivity disorder, the biggest money-spinner, and a couple of others that are heading off-patent.
In the interim, the company has agreed to pay $5.9 billion for Dyax, yet another American drug producer (a move seen as protecting its valuable hereditary angioedema franchise by buying in a competitor), while making it clear that the deal does not preclude an eventual purchase of Baxalta.
This, weekend reports suggested, would have to involve a cash element, which for complicated tax reasons would be less attractive to Baxalta investors and so would push up the eventual price. If you think no deal will be struck, then on 17 times’ earnings Shire shares look attractive.
£20bn value of Baxalkta offer?
MY ADVICE Buy long term
WHY There must be some doubt whether an agreed offer for Baxalta can be achieved, in which case Shire shares will rebound
Shares in TT Electronics are still recovering from an abrupt 40 per cent fall in November last year after a wide-ranging profit warning. Months before, Richard Tyson had arrived as chief executive and had started to assemble a new management team and there was a suspicion that he was clearing the decks. His strategy since then has been to widen the range of markets for the company’s products, lessening an earlier focus on the automotive industry.
The latest acquisition, of Aero Stanrew Group, based in Barnstaple, Devon, is an example. The company sells more than 90 per cent of its products into aerospace and is the sole source of components for programmes such as the Airbus 350, the Boeing 787 and the Joint Strike Fighter. Not only does it bring a new source of revenues, then, but there is the prospect of selling some of TT’s existing products to those blue-chip customers.
The price is not low; TT is paying £42.2 million, or more than 11 times’ this year’s earnings. This will go on to debt, which had been reducing at a faster rate than the City had expected, as TT reported last month.
One feature of the profit warning was a delay in the transfer of some automotive sensor production from Germany to Romania, with corresponding cost savings. This has been completed successfully. Profits for this year will still show a marked dip. Looking forward, the shares, up 4¾p at 157¾p, sell on 15 times’ 2016 earnings. The progress that TT is making is encouraging, but that multiple does not recommend an immediate “buy”.
£42.2m price of Aero Stanrew
MY ADVICE Avoid for now
WHY Deal is a good one, but shares look expensive
Will the Archers at Brookfield really get out of milk production? It will be of little interest to Dairy Crest come Boxing Day, which is when the company’s sale of its dairies operation to Müller completes.
This is a deal that can be described genuinely as transformational, because it means the exit from the original core business. Instead, Dairy Crest will be focused on its four key brands, the best known being Cathedral City cheese, and on the new venture producing ingredients for baby food. This has involved a £65 million investment at its Davidstow plant in north Cornwall to find a use for the by-products from cheese production.
One of these is a prebiotic, which goes by the acronym GOS. Dairy Crest is to pay £6 million to buy out its joint-venture partner, which originally supplied the know-how to produce this. Analysts have pencilled in about £6 million in profits from this and its other product, demineralised whey, in the first full year of production, but after that it is, frankly, a guess. Given the potential size of the market, the shares, up 5p at 656p and selling on 19 times’ earnings, look like good value in the long term.
Cost of buying out partner £6m
MY ADVICE Buy long term
WHY New baby food venture is unproven, but promising
And finally ...
I suggested a couple of weeks ago that John Wood Group was doing exactly what it should — as a business with a strong balance sheet and with the rest of oil and gas in crisis — and buying companies at a decent price. That was after the $192 million purchase of Infinity Group, a Texas-based contractor. Now the company has announced the acquisition, for an undisclosed but rather smaller sum, of Kelchner, which is based in Ohio and serves the midstream and upstream shale oil and gas sector in the eastern part of the United States.
