Pfizer Offers More to Lure Warner-Lambert From American Home

Just as executives of American Home Products and Warner-Lambert started celebrating their companies’ pending merger, another pharmaceutical giant, Pfizer, put the deal into doubt Thursday by offering to acquire Warner-Lambert for a substantial premium.

Pfizer announced a merger proposal that would give Warner-Lambert shareholders $82.4 billion, 13% more than the deal with American Home. Pfizer offered 2.5 shares of its stock for each share of Warner-Lambert, or $93.13 at Thursday’s closing price. At the same time, Pfizer filed suit to throw out certain “poison pill” provisions that would have the effect of blocking it from breaking up a merger already approved by the boards of American Home and Warner-Lambert.

What appeared to be a happy betrothal of equal partners could well turn into a prolonged bidding war that could attract additional suitors.

A Pfizer merger with Warner-Lambert would create a company with a market value in excess of $200 billion and annual revenue of $28 billion. “This combination would create the strongest, most dynamic pharmaceutical company in the world,” said Pfizer Chairman and Chief Executive William C. Steere Jr.

Officials at American Home and Warner-Lambert declined to comment on Pfizer’s offer Thursday. Until Pfizer made its play, their deal was expected to be completed in the second quarter of next year, following approval by the companies’ stockholders and antitrust clearance.

Under the terms of the agreement approved by the American Home and Warner-Lambert boards, if either company pulls out of the merger it would have to pay up to $2 billion in breakup fees and issue options equivalent to 20% of its stock to the other company. The impact, analysts agree, would make it extremely difficult for Pfizer to combine with Warner-Lambert.

In a letter to Warner-Lambert Chairman and Chief Executive Lodewijk J.R. de Vink, Pfizer’s Steere recalled being repeatedly rebuffed in his efforts to negotiate a merger with the smaller company.

“I want to reiterate that I have repeatedly tried over the past few weeks to discuss with you the merits of a combination between Pfizer and Warner-Lambert,” Steere wrote. “Unfortunately, our efforts have been rejected--a response that is particularly disappointing given the substantial success represented by our partnership in developing and marketing Lipitor, which both our companies have publicly acknowledged.”

Steere was referring to the two companies’ joint marketing of the best-selling cholesterol-lowering drug, whose annual sales approach $4 billion.

A 1996 agreement between the two companies prevented Pfizer from making an offer to acquire Warner-Lambert without prior permission. But that restriction ended with the American Home merger proposal.

In his letter Thursday, Steere blasted the terms of the deal that would create AmericanWarner--a company with a market value of $145 billion and sales of $26 billion. Steere described the breakup fee as “egregious” and the issuance of stock options as “improper.”

Pfizer followed up by filing suit in the Delaware Court of Chancery seeking to block those features as unlawful.

Analysts point out that a merger of Warner-Lambert with American Home or Pfizer would create a major force in the highly competitive world of prescription drugs, where no single firm dominates international markets. Size can be a virtue in an industry that requires companies to have a continuing stream of blockbuster products to maintain growth and in which savings can be squeezed out through combining operations.

“It’s amazing that AmericanWarner would be the largest drug merger ever, but combined the entity would still have less than a 5% market share worldwide for prescription drugs,” said Alex Zisson, a pharmaceutical analyst with investment bank Hambrecht & Quist.

Zisson was one of several analysts who were taken by surprise by the Pfizer offer, largely because the company had denied being interested in mergers.

“It is a mess,” said CIBC World Markets analyst Mara Goldstein. She predicted that Pfizer would prevail but not until it made a sweeter offer and could invalidate the poison pill provisions of the AmericanWarner merger.

“The American Home Products/Warner-Lambert deal offers shareholders more value long term,” she said. “But shareholders don’t want to turn their backs on a set amount of cash.”

Other competitors may be interested in buying American Home, including British drug companies Glaxo Wellcome and SmithKline Beecham, Novartis of Switzerland and New Jersey-based Merck & Co. Analysts say American Home acknowledged it could be the target of a hostile bid last month when it adopted a “poison pill” plan.

“This would put them back to where they were, and that’s in fear of a hostile bid,” said Bob Kirby, an analyst with Edward D. Jones & Co. He cited Glaxo, Novartis and SmithKline, which had merger discussions with American Home in late 1997, as potential suitors.

In addition to prescription drug sales, American Home and Warner-Lambert, both based in New Jersey, have a strong presence in the over-the-counter consumer market with such products as Robitussin, Listerine and Advil.

New York-based Pfizer has three blockbuster drugs with worldwide sales surpassing $1 billion, including the anti-impotence drug Viagra. And it has its own consumer line that includes BenGay and Visine.

The prospect of a bidding war provided a further boost to Warner-Lambert shares, which closed the day at $90.06, up $6.06. But shares of American Home finished the day at $55, down $1, and Pfizer closed at $37.50, down $1.06.

Bloomberg News was used in compiling this report.

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Pfizer’s Bold Bid

Pfizer Inc. shocked Wall Street on Thursday with an offer to buy Warner-Lambert Co.--one day after Warner agreed to merge with American Home Products. Pfizer’s stock price has tumbled since spring on worries that the company’s growth will slow because of delays in getting new drugs to market. By merging with Warner, Pfizer could ramp up growth expectations, analysts say. Monthly closes and latest for both stocks:

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Source: Bloomberg News