Pfizer - Wyeth Merger - Centrum

Rating: Buy; Target Price: Rs1,530; CMP: Rs1,605; Upside (ex-interim.div.) 22.9%

Set to derive synergies of merger

We maintain Buy rating for Pfizer with a price target of Rs1530 (excl. interim div. of Rs360) from Rs1640 due to the announcement of merger with Wyeth. We expect the merged entity to rank second among the MNC pharma companies with MS of 2.9% in the domestic pharma market. The merged entity will have 13 brands in the top 300 and will be able to attract the best talent. We have revised our FY14 and FY15 EPS estimates based on the merger ratio of 7:10. Our target price is based on 18x Sept'15 EPS of Rs84.8. Key risks to our estimates are slowdown in the domestic pharma market and lower demand for the company's products.

- Merger to strengthen operations: The merger of Pfizer and Wyeth would strengthen Indian operations through expansion across various therapeutic categories with major presence in vitamins, vaccines, women's healthcare, respiratory, CNS and anti-infectives. The merged entity will have 13 products in the list of top 300 in the domestic market. The merger will increase the long term value of its stakeholders. The merged company will have greater financial strength. The merger will create a single' Pfizer brand'.

- Margin improvement due to synergies: We expect the merged company to benefit from synergies. There is very little overlapping of products except for Gelusil and Mucaine in the antacid category. The merged entity will have better bargaining power in material sourcing. Better focus on operational effort and operational synergies would help improve margin. We expect margin improvement from 17.8% in FY13 to 23.1% in FY16 due to synergies of merger.

- Fair valuation ratio: The share swap ratio is 10 shares of Wyeth for 7 shares of Pfizer and this 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 announced interim dividend of Rs360 per share and Wyeth Rs145 per share. The interim dividend will be paid on 13th December'13.

- 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 would be from Pfizer (including 675 for Wyeth) and 320 from Wyeth.

- Major brands to drive growth: We expect the merged company to report consistent performance due to the strong growth of its 13 major brands. We revise our EPS estimates based on the above mentioned merger terms. We value the stock at 18xSept'15 EPS of Rs84.8 and arrive at target price of Rs1,530 (excluding interim dividend) with a 22.9% upside from CMP. Key risks to our estimates would be slowdown in the domestic market and lower demand for the company's products.

Source : Equity Bulls

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