Pfizer - Event Update - Internal Corporate Restructuring - positive - Centrum

Rating: Buy; Target Price: Rs1,600; CMP: Rs1,141; Upside: 40.2%

Internal Corporate Restructuring - positive

We maintain Buy rating on Pfizer with a price target of Rs1,600 due to positive developments on internal corporate restructuring. Two subsidiaries of Pfizer Inc, US, Pfizer Investments Netherlands BV (PIN) and Pfizer Corporation, Panama (PCP) will transfer their respective holdings in Pfizer India to Pfizer East India BV, Netherlands (PEN). The transfer of PIN holding will be done at Rs1,537 per share against the CMP of Rs1,141. PCP's holding will be transferred as a gift for no consideration. This is a consolidation step of Pfizer India's holdings before the proposed merger with Wyeth. Key risks to our estimates are slowdown in the domestic pharma market and delay in merger with Wyeth.

- Corporate restructuring: In this internal corporate re-structuring, PIN will transfer 8.81mn shares (29.52% of its holding) in Pfizer India to PEN at Rs1,537 per share. Similarly, PCP will transfer 9.38mn shares (31.42% of its holding) to PEN as a gift for no consideration. After these transfers, PEN will hold 18.19mn shares (60.94% of holding) to consolidate its position in Pfizer India. The acquirer PEN and sellers PIN and PCP are ultimately held and controlled by Pfizer Inc, US. The proposed transaction will take place on or after 28th February'14. The transfer price of Rs1,537 has been arrived at from the weighted average market price of Rs1,340.72 for a period of 60 trading days preceding the date of issue of notice.

- Fair valuation ratio: The recommended share swap ratio of 10 shares of Wyeth for 7 shares of Pfizer is fair to minority shareholders of Wyeth. The valuation methodology is based on market values, trading multiple and discounted cash flow (DCF). The ratio has been arrived at after considering the payment of interim dividend. Pfizer has paid interim dividend of Rs360 per share and Wyeth Rs145 per share. Interim dividends were paid on 13th December'13. Hence, the shareholders of both companies have benefitted.

- Parent's holding to decline: The parent company Pfizer Inc, US currently holds 70.8% in Pfizer India and 51.1% in Wyeth India. As per the recommended swap ratio the parent company's holding would come down to 63.9%. The merged company will have 2.9%MS in the domestic pharma market and will rank second among MNC pharma companies after Glaxo SK Pharma. The merged company will have a combined field force of 2,320. Of these 2,000 will be from Pfizer (including 675 for Wyeth) and 320 from Wyeth.

- Valuations and key risks: We expect this internal corporate restructuring to help consolidate the parent company's holding in Pfizer India. We expect the merged company to report consistent performance due to strong growth of its thirteen major brands and strong field force in the domestic market. We have valued the stock at 18xDec'15 EPS of Rs88.9 and arrive at a target price of Rs1,600 with a 40.2% upside from CMP. Key risks to our estimates are slowdown in the domestic market and delay in merger with Wyeth.

Source : Equity Bulls

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