As a strategy to realise value, shrinking a business is a road many management teams are reluctant to go down, so credit should go to the board of Pfizer for what they have achieved over the last few years. The latest in a series of value-enhancing actions came on 22 May with the announcement the US-based pharmaceutical giant would spin off its majority stake in animal health business Zoetis.
In February, Pfizer raised $2.2bn (£1.4bn) by selling off 20% of Zoetis in an IPO the new transaction aims to complete the spin-off by giving shareholders the chance to swap some of their Pfizer shares into Zoetis shares, with the Zoetis shares priced at a 7% discount to sweeten the deal. While the spin-off will not generate any cash proceeds, Zoetis’ shares are trading on a much richer PE multiple than Pfizer’s, so the deal should still be value enhancing for those who chose to hang onto their Pfizer shares instead.
The progressive exit of Zoetis comes after the sale of Pfizer’s infant nutrition business to nestle in 2012. This asset also attracted a very rich valuation multiple and the proceeds were put to good use with Pfizer using much of the almost $12bn generated by that deal to fund its ongoing share-buyback programme.
So far this year, Pfizer has bought back more than $6bn of its own shares and, while it is currently authorised to repurchase a further $5.5bn-worth, the board has not been shy about authorising further buybacks so this trend may well continue. There are also options to further restructuring of Pfizer’s business, the spin off of its generics business is seen as one possibility for example.
The value-realisation strategy being pursued by Pfizer’s management has proved very positive for shareholders, to the extent that the company’s shares have comfortably managed to outperform the strongly rallying market, rising well over 100% over the last three years.
In the past, the market has tended to be quick to dismiss Pfizer as a sprawling mass – or even mess – of a business, mainly as a result of a series of major mergers over the course of the first decade of this century that saw it become the world’s largest pharmaceutical company.
Because of this, investors forgot about high quality assets such as the animal health and infant nutrition businesses and focused only on the problems associated with Pfizer’s pharmaceutical businesses and its dry period for finding new blockbuster drugs. By pulling these other assets out into plain sight where investors can appraise them properly management have unlocked a lot of value that was previously hidden and this has been to the benefit of shareholders.