On Monday January 26, 2009, Pfizer (PFE) made a definitive announcement to acquire Wyeth (WYE) in a deal estimated at nearly $68 billion or $50.19/share at the time of announcement. Since Dow Jones had already reported on the deal the previous Friday, the stock appreciated from Thursday's close of $38.83 to $43.74 on Friday, January 23, 2009. Hence I am going to use $38.83 as a pre-deal price.
Pfizer is offering $33 in cash plus 0.985 of a Pfizer share in exchange for each share of Wyeth. With the 0.985 share of Pfizer working out to $17.19 at the time of announcement, the cash component of the deal worked out to $44.7 billion. Pfizer ended 2008 with nearly $24 billion in cash and short-term investments on its balance sheet and has decided to raise $22.5 billion in debt for the deal from a consortium of banks. Since this is a friendly acquisition, the key risk appears to be Pfizer's ability to raise this debt. The deal is expected to close by the end of the third quarter of 2009 or in the fourth quarter.
Based on the Feb 27, 2009 close of $12.31 for Pfizer, the 0.985 share component works out to $12.12. Combining that with $33 in cash, the deal is worth $45.12 to Wyeth shareholders right now. Wyeth shares closed at $40.82 last Friday, representing a discount of $4.30 or 9.5% to the value of the deal.
Some of the analysis I have come across for this deal, tends to ignore the impact of Wyeth's dividend on the overall return. Wyeth pays a $0.30 dividend per share each quarter. The first quarter dividend will be paid on March 2nd for shareholders on record Feb 13, 2009 and hence I have not included it while computing the total payment in the table below. The table below looks at actual returns and annualized returns for the arbitrage opportunity for two scenarios. The first scenario assumes the acquisition will close by the end of the third quarter, translating into a 7-month holding period (0.58 years). The second scenario assumes an end of fourth quarter close or a 10-month holding period.