American Home Products and Pfizer in bidding war over Warner-Lambert

Weekly Corporate Growth Report, Nov 15, 1999 by Nasri, Jennifer

Shares of Warner-Lambert Co. have been steadily increasing due to the growing sentiment that Pfizer, Inc. is not only sincere about its $82.4 billion allstock bid for the company, but will raise the bid, if necessary. What led to some confusion as to the seriousness of Pfizer's offer was the fact that in addition to making a bid, Pfizer also filed suit to throw out certain poison pill provisions that would in effect make it impossible for any company to break up the merger which had already been approved by the boards of both American Home Products and Warner-Lambert.

Pfizer's bid surprised WarnerLambert's executives, who at the time were in the middle of a live television interview regarding the American Home Products deal. Pfizer's hostile bid came just hours after American Home Products and Warner-Lambert announced a $70.1 billion merger agreement.

Warner-Lambert, which makes numerous best-selling household products such as Certs mints, Trident gum and Schick razors, as well as the cholesterol fighting drug Lipitor, is considered a prize within the industry.

Pfizer, the world's fifth-largest prescription drug maker, is best known for its impotence-treatment pill Viagra. American Home Products, the eighth-largest maker of prescription drugs in the world, produces Advil, Robitussin cough syrup, Chapstick and the hormone replacement drug Premarin.

Pfizer's bid values Warner-Lambert at $87.19 a share based on Pfizer's closing price on November 10, 1999, while American Home Products' bid values Warner-Lambert at $81.96 a share. Shares of Warner-Lambert rose nearly 2%, to close at $92.16 on the New York Stock Exchange, well above the value of both Pfizer's and American Home Products' bids.

A merger between American Home Products and Warner-Lambert would create a company with $26 billion in annual sales and a 5.5% global market share, while a Pfizer deal would produce a $28 billion business with a 6.3% global market share. Regardless of which company winds up acquiring Warner-Lambert, the combined company would be the world's No. 1 maker of prescription drugs. Astra Zeneca, currently the world's largest prescription drug company, has only a 4.2% global market share.

Analyst James Keeney believes that Pfizer may raise its bid for Warner-Lambert to $100-$105 a share, or up to three Pfizer shares for each Warner-Lambert share. "If Pfizer were to make such a revised offer, we believe that American Home Products would respond in kind, but would ultimately lose a bidding war versus the vastly larger Pfizer," Keeney stated in a research report.

Pfizer's shares have been under pressure during the past few days due to the belief that the company's earnings might decline if Pfizer drops the conditions to its bid or gets into a bidding war. As Pfizer's share price drops, so does the value of its bid for Warner-Lambert. Regardless of who wins the bidding war, it seems that the best investment opportunity in this situation is to purchase shares of WarnerLambert, since these shares are more than likely to increase in the short term if the bidding intensifies.

Source: Wall Street Journal, New York Tunes, Reuters