When AstraZeneca and Novartis announced the planned merger of their agrochemical businesses late last year, a question mark hung over the deal. In times of poor yields was this an astute move? In farming parlance, could it be likened to linking up an old tractor with a rusty trailer and sending them out into the fields in desperate search of a return?
Of course, the creation of Syngenta was positioned rather differently by its parents. The message they wanted to convey was that the entity they were creating would be the first global, dedicated agribusiness company: number one in crop protection; number three in seeds; and with a combined revenue of nearly $8 bn. With Novartis’s Heinz Imhof as the chairman-designate and AstraZeneca’s Michael Pragnell as the chief executive-designate, here was a deal estimated to bring $525 mn-worth of cost savings.
For Novartis’s head of investor relations, Wolfgang Kirchmayr, the deal has already clarified market perception of its core business, which indicates that investors and analysts were persuaded by the arguments.
He thinks the company’s shareholders can profit from a more focused Novartis and also from the creation of a dedicated leader in agribusiness. He says analyst interest was generally divided between those focusing on the new Novartis and those who specialize in crop protection and agribusiness, who were more interested in Syngenta’s future.
‘The financial world wasn’t surprised that we decided to do this,’ Kirchmayr reports. ‘We’d already indicated some months before that we were looking at all strategic options for our agribusiness. Many analysts drew the conclusion at that time that we would decide to focus more on healthcare. The difference now is that the financial world clearly values us and looks on us as a healthcare company. Analysts have changed their view on our company since the announcement.’
A tight-lipped AstraZeneca spokesman says that, until the Syngenta prospectus is issued, there isn’t sufficient information for the analysts to comment conclusively on the proposed new company. When it is, it will become the concern of agrochemical specialists, not pharmaceutical analysts.
Axa’s life sciences analyst John Bowler tends to agree. ‘Pharmaceutical analysts haven’t really gone deep enough into looking at the make-up of these businesses and I think the companies are acutely aware of the importance of good disclosure,’ he says. ‘Given that Syngenta will be the only true agribusiness company in the market to be quoted, it’s likely they will disclose more to analysts and give them more to write about.’
Bowler thinks both sets of shareholders should do equally well – except that a portfolio manager running a UK-only fund might face some difficulty in holding a stock that will have its primary listing in Switzerland. While Syngenta will be quoted in London as well, it won’t necessarily get into the index; and that would mean UK tracker funds having to dispose of it.
Expectation of greater disclosure is one thing; the true value of the deal is something else. The positive spin from Novartis and AstraZeneca certainly didn’t win over everyone in the financial community. The annual general meetings in April and May will clearly provide the defining judgement on whether investors feel this move is good for shareholders and whether it truly clarifies the strategic focus of the parent organizations. Then all that’s needed is approval from the US and European regulators which is anticipated in the fall.
It was the downturn in the agrochemicals market – believed to be the worst in 30 years – which prompted the Syngenta deal. In such a tricky climate, largely attributed to reduced crop yields in the US, investors and analysts were already anticipating some sort of positive action from both companies, but not necessarily along the lines of the course they eventually decided to pursue.
Simon Conway, pharmaceuticals analyst at Williams de Broe in London, is broadly convinced by the parent companies’ presentation of the deal. However, he adds, ‘You could also argue that at the first sign of trouble they are trying to sidestep the issue rather than bolt down the hatches and weather the storm. It means there are now two sets of companies in this market. The ones like AstraZeneca and Novartis, which have a focused pharmaceutical unit and believe that focus is what’s important. And the ones like Aventis and Bayer which are saying there’s enough synergy, especially at the basic sciences level, to make combining drug and plant research worthwhile.’
So who’s right? Conway says it’s too early to tell. The rationale behind both is equally convincing. Perhaps after another year of very poor market conditions there will be a chance to evaluate which is the better strategy.
Size matters
Stephen Ewing, pharmaceuticals analyst at London’s WestLB Panmure, believes it is more a question of size than commitment. Aventis has greater critical mass and can afford to be more strident about the potential for its agrochemicals business.
‘But I would say that the timing of AstraZeneca’s move was later than expected,’ he notes. ‘Most people were in favor of getting rid of it earlier while it was still relatively strong. Either way AstraZeneca’s agrochemicals business had to go because this area was never going to provide the answer to its product pipeline issues, such as the impending licence expiry on its key drug, Losec.’
Ewing has no problem with the shift away from life sciences to a sharper focus on the pharmaceutical business. In any case AstraZeneca’s previously-stated strategy was slightly disingenuous, he believes.
However, Michael King of SG Securities counters the view that the companies weren’t serious about their life science strategies. Hindsight is a marvellous thing. ‘Historically people thought there was some sort of synergy between agrochemicals and ‘pharma’, but in practice it hasn’t really been that way,’ he explains. ‘The key question in these circumstances is how can you extract as much shareholder value from it as possible. The obvious answer to that is to consolidate like this so that the value is retained with the shareholders and they have the option of whether they want to stay invested in this business or not. At the same time they are generating shareholder value by creating cost-savings by merging the two together.’
King thinks AstraZeneca’s shareholders have perhaps come out slightly better. AstraZeneca will contribute less than 39 percent of the shares investors are being offered. However, he has not upgraded his view of the parent company on the back of this. The issue of its Losec patent expiry has a much greater impact on stock valuation. As for Novartis, he was already positive about the Swiss company. Despite a very bad year it still has a healthy pipeline of products to offer. The Syngenta deal is an added bonus.
Winning argument
M&G’s pharmaceuticals specialist, Patrick Harrington, was initially disappointed that AstraZeneca didn’t just dispose of its agrochemical arm. However, he appears now to have been won over by the arguments.
‘An agrochemicals disposal a couple of years ago, when the market would probably have benefited the shareholders more, would have been desirable,’ Harrington says. ‘However, there are quite significant merger synergies to be extracted from the two businesses. Also the commitment to float the new company off leaves AstraZeneca as a pure pharmaceuticals business. So it should command a higher rating.’
Having attended AstraZeneca’s research and development presentation in early December, Harrington is convinced it has an interesting pipeline of new products coming along – particularly the cholesterol-lowering compound. The remaining bone of contention for him is whether its replacement product for Losec will provide enough market share to partially offset the inevitable fall in Losec sales.
Iain Daly, consumer analyst at UK broker Charles Stanley, thinks the creation of Syngenta was less about what Syngenta can do, more about getting rid of the agrochemicals businesses from the respective portfolios of AstraZeneca and Novartis.
As for any supposed lack of fidelity toward their respective life science strategies, Daly says that’s really a question of definition. ‘There are those that argue agrochemicals doesn’t play a role in the life sciences industry, that it is very much its own industry and, as such, ought to be defined by itself. I’ve always taken the view that a pharmaceuticals company ought to be a pharmaceuticals company and nothing else. I never really saw there to be a great amount of fit with agrochemicals. There’s no research and development overlap and no sales overlap. I think AstraZeneca and Novartis will still be happy to call themselves life science companies.’
Clearly the deal awaits closer inspection and when this happens investors will be able to scrutinize the tractor’s engine and kick the tires of the trailer. Then they will be able to truly decide whether this combination is fit for the task or is more likely to break down on the hard and rutted fields ahead.
