Based on all the rumor pieces about which companies are bidding -- if any one of them pays more than $7 billion (or 3.2 times trailing year's sales revenue) -- they will be overpaying.
I said so just before Valentine's Day 2014 -- and I say so again now. Of course -- Mr. Frazier, as honest a guy as he otherwise is -- has a powerful incentive to try and get people to sweeten their bids, right at the end, here. The reputed U.K. bidder is the most likely one to fall for this ploy, as I suspect it is already at the higher end of what would be fair value. So Mr. Frazier appeals to their fear of losing the contest -- hoping they will overpay. That's smart business negotiating, true enough.
And so, if someone pays north of $7 billion -- it is likely to be a United Kingdom (or less likely, and EU) firm, and that firm will have. . . overpaid.
This is simply not a high growth, high margin set of businesses. And we all know this group of assets needs some investment -- to start to turn the corner, and meaningfully increase sales. Last year, sales were flat to down, depending on how you decide to include or ignore currency effects.
And not entirely coincidentally, that would be why an EU (or even a United Kingdom -- or less likely, a Japanese) buyer might be able to defend a slightly higher price. Such a firm would see currency-driven tailwinds at the sales line. By way of contrast, a US firm will face some real currency headwinds at the sales line -- and would need major "natural" hedges in the EU, to offset. Such a US firm would own substantial plant and equipment in Europe (or the UK).
And clearly the audaciously fictional Novartis swap rumor is dead. Dead. Now we wait -- but fair value for these assets is about three times trailing sales. That's my $0.02.
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