Pfizer’s Choice: Sale or Spin Off

Drug giant Pfizer (PFE) looks like a more-than-willing seller. In early February, 2006, the company announced it was exploring the possibility of selling or spinning off its consumer business. The move made sense — in part because consumer businesses enjoy higher valuations these days than depressed prescription drug players.

The betting was that Pfizer’s $3.9 billion operation, which includes brands like Listerine and Visine, could be worth more than $10 billion.

TAXING ISSUES. On Mar. 29 bidders were submitting preliminary offers for the unit. But Wall Street pros are warning an outright sale may not materialize.

No doubt there are plenty of potentially interested parties, including the likes of Colgate-Palmolive (CL), GlaxoSmithKline (GSK), and Johnson & Johnson (JNJ). However, a sale of Pfizer’s consumer business would result in a major tax hit to the seller.

That’s why bankers say Pfizer will want any buyer to cover some of that tax bill, potentially bumping the price to more than $3 billion. In the end it may be difficult to get to the right price.

CASH ON TAP. That’s why one investment banker who has looked at the deal thinks there is a good chance Pfizer will instead spin off the asset to shareholders, a move that wouldn’t yield a big tax hit. “It wouldn’t surprise me at all if this ended up as a public company,” says the banker, who asked not to be identified.

In fact, Pfizer is hardly desperate for the bucks a sale of its consumer business would generate. in 2005, Pfizer’s operations generated $14.7 billion in cash. And by yearend the company had nearly $23 billion in cash and short-term investments. So if Pfizer wanted to make acquisitions to fatten its new-drug pipeline, the company would have no problem doing that now.

While a sale of the consumer business would certainly give Pfizer an even fatter wallet, the outfit “doesn’t need more cash,” says Trevor M. Polischuk, a pharmaceutical analyst at Orbimed Advisors, a healthcare-fund management firm.

PAIN RELIEF. In fact, investors hardly seem to be clamoring for Pfizer to spend its newfound wealth on mergers and acquisitions. Lenny Shimunov, a portfolio manager at Dreman Value Management, which is a Pfizer investor, says shareholders would like to see increased share repurchases by Pfizer or a further hike in the dividend. “To the extent they deploy [proceeds from any sale of the consumer business] in a shareholder friendly way,” says Shimunov, “That would be a positive.”

Given the depressed stock price — down more than 37% in the past five years — chances are that investors will be happy with any move that relieves even a bit of their pain.