Pfizer Most Likely Suitor for Warner-Lambert

Pfizer (PFE) appears to be in the best position to take over rival pharmaceutical company Warner-Lambert (WLA) now that Procter & Gamble (PG) has terminated discussions with both Warner-Lambert and American Home Products (AHP) about acquiring them.

"Pfizer remains the most likely company to buy Warner-Lambert," said Leonard Yaffe, an analyst at Banc of America Securities. He cited Pfizer's current multiple of 34 times 2000 earnings, while other drug companies typically trade at multiples below 30. (Warner-Lambert, though, is currently trading at 38 times earnings.) He also cited Pfizer and Warner-Lambert's co-marketing agreement for the blockbuster cholesterol drug Lipitor as a difficult barrier for other companies to surmount.

Yaffe rates Pfizer a buy and Warner-Lambert a strong buy, and his firm has not done underwriting for either company.

Pfizer's biggest advantage is the value of its bid, compared with that of its only competitor as of now.

American Home first bid for Warner-Lambert in November, but as its stock price has sagged, the current value of its bid has fallen to about $55 billion from an initial $78 billion.

Meanwhile, Pfizer's hostile counterbid for Warner-Lambert is currently valued at $74 billion, down much less from an initial $82 billion.

Pfizer offered 2.5 of its shares for every Warner-Lambert share, while American Home offered only 1.49 of its shares.

Pfizer shares closed Monday trading down 11/16, or 2%, to 34 3/8, so Warner-Lambert shareholders would receive shares worth $85.94 based on that price.

In contrast, American Home's shares closed 5 3/8, or 11.2%, at 42 5/8. Based on that price, Warner-Lambert shares would be worth only $63.51 apiece.

Warner-Lambert's stock, however, closed Monday at 87 15/16. Despite its drop of 4 1/16, or 4.4%, that price indicates that Wall Street still expects a bid somewhat richer than the current one from Pfizer.

Pfizer has also boasted a very strong financial case for an acquisition of Warner-Lambert. Pfizer is committed to 24% pro forma earnings per share growth for the next three years, while American Home is only committed to 20%. Pfizer is also committed to 43% return on equity while American Home is only committed to 34%.

"Pfizer is committed to a transaction with Warner-Lambert," said Tony Butler, an analyst at Lehman Brothers, who spoke with a Pfizer executive early Monday. He warned, however, that any company seeking to snatch up Warner-Lambert would have to dissolve the contract already reached between Warner-Lambert and American Home in early November, which Pfizer is trying to do. Pfizer may also have to pay a breakup fee of $1.8 billion to American Home.

"At this point, any white knight would have to buy the combined American-Warner combination," like P&G was willing to do, Butler said.

Though Pfizer remains the company with the most realistic bid, Warner-Lambert may still try to escape its clutches by seeking to court another company, either another pharmaceutical concern or another company that is "tangentially involved in the industry, like a P&G, a consumer conglomerate with a small presence," Yaffe said.

The number of candidates, however, is dwindling. Merck (MRK) "has been stoic about denying any interest in a deal," Butler said. And neither Bristol-Myers Squibb (BMY) nor Eli Lilly (LLY) has expressed any strong interest.

Companies based outside the U.S. are a possibility, too, though a dim one. Switzerland's Novartis (NVTSY) is reported to be interested in a possible merger with an American company, though American Home and Pharmacia & Upjohn (PNU) are considered likelier partners. Swiss companies like Novartis and Roche Holding "have cash or access to cash," Butler said, and that would put them in a good position to offer a cash-and-stock or all-cash deal. Both American Home and Pfizer have offered all stock.

For its part, in a statement released Monday, Warner-Lambert said that in an effort to maximize shareholder value, it would continue to explore strategic alternatives, "including discussions with Pfizer."

Yaffe said Warner-Lambert's continuing negotiations with other companies were likely to force Pfizer to raise its bid. "I would not be surprised if there were a higher offer, possibly at $100 a share," he said.

Butler also sees the bid going up, but only to 2.75 Pfizer shares for each Warner-Lambert share and definitely not to 3. That would make Pfizer's bid worth about $95 a share.

A call to Pfizer for comment was not immediately returned.

But if Pfizer was forced into paying a $1.8 billion breakup fee for an aborted American Home and Warner-Lambert merger, that would probably eliminate Pfizer's projected cost savings from an acquisition. Pfizer has said the cost savings would be $1.2 billion to $1.3 billion, although Butler estimates the savings could be twice that.

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