Tuesday, December 22, 2009

2009 Exits/Financings DOTY Nominee: BMS Spins Off Mead Johnson

It's time for the IN VIVO Blog's Second Annual Deal of the Year! competition. This year we're presenting awards in three categories--that's 300% more fake prizes than last year!--to highlight the most interesting and creative deal making solutions of the year. The categories are: Big Pharma Deal of the Year, M&A/Alliance Deal of the Year, and Exit/Financing Deal of the Year. We'll supply the nominations (roughly half a dozen in each category throughout December) and you, the voting public, will decide the winners (by voting early and often, commencing once we've announced all the nominees). Strap yourselves in, it's The Race for the Roger™.

It's no secret that Bristol-Myers Squibb has spent the last couple years solidifying its stance as a pure biopharma play. Is the company better positioning itself for sale? Going all in on the only thing it thinks it does well to try to stick it out for the long haul ahead of a monster patent cliff? In any case, it's an outlier. And its most recent and perhaps final move to focus on prescription biopharma suggests a confidence in that core business--or a last stand.

While BMS purges non-biopharma assets, others are diversifying at breakneck pace. Just yesterday Sanofi-Aventis said it would spend $1.9 billion to make a splash in the US OTC products market, for example.

Meanwhile BMS was busy trading shares of its nutritionals unit, Mead Johnson, for its own shares in a spin-off of the division. Bristol won't receive cash for the deal, but the transaction will be accretive to earnings in 2010 by reducing the number of Bristol's shares outstanding, thus increasing earnings per share. The exchange offer will also be attractive to shareholders because it is expected to be tax free.

The stock-swap follows BMS's decision to sell a small percentage of the company in an IPO that was completed in February. That offering raised $720 million and seemed to give BMS some of the virtues of diversification (it could, as a majority shareholder, still consolidate the nutritionals group's top and bottom lines with its own) but allowed for management focus: it was run as an independent unit.

But Bristol reckoned that those 170 million remaining Mead Johnson shares, if all exchanged, would give it a ten-cent pop in EPS next year. Plus with all those shares retired, the company will improve its cash flow by paying out $350 million less in dividends (er, that's provided it doesn't raise its dividend on the remaining shares, and without subtracting the smaller dividend it got from its MJN holdings). What's more, MJN shares are way up since the IPO, so why not take advantage of that valuation bump?

Essentially, the move prioritizes short-term gain over long-term stability. Proponents of the deal say that's OK, because without some sort of short-term gain to appease investors, BMS might not have a medium- or long-term future in which to let it's string-of-pearls strategy play out.

The bottom line is that BMS needs to keep its rivals at bay by maintaining or boosting its worth in the face of two massive patent expirations (Avapro and Plavix) to make sure nobody can buy them on the cheap. That means good growth from existing and in-line products and potentially spending its $10 billion cash pile on a few more near-market pearls.

That's no easy task, but its two-part parting of the ways with Mead Johnson is a creative and lucrative pair of transactions that puts it in the best position to succeed.

image by flickr user nerissa's ring used under a creative commons license

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