The Wall Street Journal announced August 13 that Pfizer (NYSE:PFE) filed plans to sell up to 20% of its animal-health unit in the first half of 2013. Credit Suisse estimates the spinoff could bring Pfizer as much as $3.8 billion initially and much more once it sells the remaining 80% stake in Zoetis. Pfizer shareholders should be elated at the news. Here's why.
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Pfizer's up 35% in the last 52 weeks. However, long-term it hasn't done nearly as well as its peers. For instance, over the 10-year period ended August 10, Pfizer averaged an annual total return of -0.22%, 225 basis points worse than Merck (NYSE:MRK) and 463 points worse than Johnson & Johnson (NYSE:JNJ). Therefore, share repurchases and anything else that can juice its earnings is welcome news. Assuming it sells the entire animal-health unit for $18 billion over the next 12-24 months it could buyback as many as 752 million shares at present prices, which would reduce the total number of shares outstanding by approximately 10% and increase earnings per share by 12%. With the loss of market exclusivity for Lipitor, the repurchase plans should help offset any loss in sales.
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Pfizer estimates that vaccines and medicines for animals is a $22 billion dollar market. If so, its 2011 revenues of $4.2 billion make it the largest manufacturer in the world with a 19% market share. Furthermore, because animal-health research and development is faster, less expensive and more predictable than human pharmaceuticals, it's a great business to be a part of.
In addition, while human pharmaceuticals often involve insurance, most animal-health customers pay out-of-pocket, making it a more reliable business. With so much of Pfizer's focus on human pharmaceuticals, opportunities in emerging markets while substantial are likely not being exploited to their full potential. Giving the animal-health unit its independence is definitely what's best for Pfizer shareholders as both companies will be able to focus on their respective businesses.
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Phil Rosenthal of the Chicago Tribune wrote a great article at the end of June summarizing why spinoffs make so much sense. Utilizing the experience of Joe Cornell, founder of Chicago's Spinoff Advisors, Rosenthal points out that spinoffs have historically outperformed the S&P 500 by a substantial margin.
Furthermore, citing examples like the 2005 spinoff of CBS (NYSE:CBS) by former parent Viacom (Nasdaq:VIA), the spinoff often does better than the parent because independence forces its management team to survive and thrive on its own. In addition, once free of its parent, it's able to secure capital without having to beg. That makes a huge difference in a company's success.
The Bottom Line
As I understand the Pfizer/Zoetis IPO, Class A shares will be exchanged in return for debt held by the underwriters (debt retired) and then those shares will be sold to the public. They're doing this in order to avoid paying tax on the cash. Eventually, Pfizer will likely distribute its Class B shares, which are worth 10 times the votes, to Pfizer shareholders in the form of dividends. In short, Pfizer shareholders appear to be the big winners in this arrangement.
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At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.