Fascinating: "What's Old -- Is New, Again": Suggestion Of CVRs -- In AZ/PFE Retooled Deal? NOT "Obviously" The Right Answer.

A commenter asked below what I thought of the bankers' rumors -- currently in vogue -- and circulating, suggesting that Pfizer might rework its "tough-guy" offer for AstraZeneca and throw in what are called CVRs -- in a new structure. My answer is in blue, below.

So to it, then: Anonymous said. . . on another topic, your thoughts [on this Reuters article]?

June 16, 2014 at 10:51 AM

-- Anonymous

. . . .Condor said. . .

Well, that is a very common technique -- using CVRs in smaller deals -- to bridge the gap.

To write a contingent value right that means anything though, one must make many, many assumptions about the cost structure and probable price point -- for a given drug/therapy/product. One that might be years -- or half decades -- off.

And then the other side must agree to those assumptions. Otherwise, the solution really amounts to little more than kicking the can down the alley -- i.e., "we will negotiate about it later".

Note that any CVR driven off of a product's sales requires guessing at likely margins to come up with a fair value on the rights.

Similarly so, any EBITDA driven CVR -- for any wholly new business unit.

So -- one can write a CVR driven only by sales revenue totals (as that is a very easily verified number) -- but what percentage of sales should each right be worth? That is a multi-billion dollar conundrum.

So to apply it to Pfizer's largely hostile AZ bidding, if the incremental future oncology sales revenue may reach ten to thirty billions of dollars, then a few points here or there, will really be a fight. A "go to the mat" sort of fight.

Thus one often ends right back -- where this deal broke off: Pfizer wouldn't/won't agree to come up another $4 or $5 billion.

Even on $118 billion, $5 billion is real money.

So -- I'll bet that AZ won't invite Pfizer back at the end of the "cooling-down" period -- three months (under UK takeover rules) -- and when Pfizer pitches again in six, i.e., November (and Pfizer will so pitch!), it ought to pitch closer to $128 to $130 billion.

Just my guesses.

Namaste -- great link!

Do stop back.

June 16, 2014 at 3:25 PM. . . .

M&A arbitrage -- always an entertaining parlor game -- but truly engrossing, at this jaw-droppingly gargantuan scale.