Procter & Gamble Terminates Warner-Lambert, American Home Talks

In response, Warner-Lambert said it would explore its options.
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Updated from 12:39 p.m. EST

Procter & Gamble

(PG) - Get Report

said Monday it had canceled merger talks with

Warner-Lambert

(WLA)

and

American Home Products

(AHP)

, saying leaks and speculation had tainted the environment for moving forward with the deal.

Rumors and speculation over a possible takeover of the drug makers by P&G have circulated for about a week, and have hurt shares of P&G as investors questioned a foray into the sometimes risky and always cut-throat drug trade.

"We have concluded that leaks and resulting speculation on a possible transaction have created an environment in which we cannot continue meaningful discussions," Durk Jager, chairman and chief executive of P&G, said in a statement.

P&G shares dropped nearly 9% last Friday, and were down 4 points, or 4%, at 98 11/16 Monday when trading was halted pending the news release. With P&G's stock price depressed, any deal for Warner-Lambert and/or American Home Products would have been more expensive for P&G than when talks first began, since any deal would have likely involved an exchange of stock.

After the announcement, P&G shares rebounded, closing up 3/16 at 102 7/8.

With P&G out of the picture, all eyes are on drug giant

Pfizer

(PFE) - Get Report

as a potential bidder for the two drug makers.

Warner-Lambert and American Home Products agreed to merge last November in a deal currently valued at roughly $55 billion in a merger of equals to create

American Warner

, with market capitalization of about $145 billion.

Lowell Weiner, a spokesperson for American Home Products, said the merger is still expected to be completed by June 2000.

Warner-Lambert has been locked in a

battle after it repeatedly rejected a hostile bid from Pfizer currently valued at $74 billion. Warner-Lambert reluctantly decided on Jan. 13 to negotiate with Pfizer, but at the same time, speculation started sprouting about the potential for a deal with P&G.

After P&G made its announcement, Warner-Lambert said it would continue to explore its alternatives, including talks with Pfizer.

Meanwhile, American Home Products said it remains committed to its merger plans with Warner-Lambert.

"We continue to support the strategic merger of equals under our existing agreement," said Weiner.

Warner-Lambert spokesperson Carol Goodrich also confirmed that the merger plans are still on.

Shares of Warner-Lambert, which had been halted pending the P&G announcement, closed down 4, or 4%, at 88 by early afternoon after they reopened.

Shares of American Home Products and Pfizer were also halted for a time. American Home's shares closed down 5 3/8, or 11%, at 42 5/8 by early afternoon. Pfizer's shares settled down 11/16, or 2%, at 34 3/8.

The proposed deal between Madison, N.J.-based American Home Products and Morris Plains, N.J.-based Warner-Lambert would bring together such well-known over-the-counter products such as Listerine, Rolaids, Dimetapp and Chapstick, as well as prescription products such as the popular Lipitor anti-cholesterol drug and Premarin, a post-menopausal hormone therapy for women. Annual sales for the two companies are expected to be around $26 billion.

Some analysts say that a deal with New York-based Pfizer, whose primary business is drugs, would make more sense than it would have with P&G, which does only about 2% of its existing business in drugs.

"Pfizer's still got the best currency," said a buy-side analyst who covers the pharmaceutical industry. "If Pfizer announces a deal with Warner-Lambert, that stock will go up because investors see it as a very favorable deal. There are few companies that could argue as much in the way of cost savings as Pfizer can."

The analyst, who spoke only on background, noted that Warner-Lambert might have been courting P&G solely to try to increase bids from other potential suitors, and that the company is probably ready to consider as many bids as it can.

For Warner-Lambert and AHP shareholders, one problem with Pfizer's deal could be that it is all stock, and they might want to get some cash out of a merger.

Potential alternative partners being talked about include European pharmaceutical companies such as

Novartis

, which is known to be cash-rich and could offer a combination of cash and stock.

Meanwhile at P&G, Jager is not likely to retrench in his expansion efforts despite canceling the talks with Warner-Lambert. The feisty chief executive has promised big changes at the sometimes stodgy consumer products giant

The company's hunger for merger partners is evidenced by the Warner-Lambert talks, as well as a recent unsolicited

bid for

Gillette

(G) - Get Report

which was rejected,

The Wall Street Journal

reported Monday.

Last year, Cincinnati-based P&G bought pet food maker Iams for $2.3 billion.

The merger is the third that American Home Products has neared in recent years: One with

Monsanto

(MTC) - Get Report

, which broke down after an agreement was reached, and one with

SmithKline Beecham

,

(SBE) - Get Report

, which failed just before an agreement was announced.