A Quarter-Trillion Buyout? Imagine the Fees!

No doubt the PowerPoint slides are being reviewed, critiqued, and reworked at the Pfizer corporate office in preparation for Friday’s Big Analyst Meeting.

Pfizer, hailed Company of the Year by Forbes Magazine in its January 11, 1999 issue, has lately fallen on very hard times—both business-wise and stock price-wise, and analysts, widows, orphans and brokers are eagerly looking for guidance at tomorrow’s first post-collapse presentation to Wall Street’s Finest.

Is it any coincidence that Pfizer’s stock peaked at $50.04 on April 16, 1999—just three months after the Forbes Cover Story?

Everybody on Wall Street has either experienced first-hand or knows examples of the “Cover Story Curse”—the tendency of major publications to recognize a major trend, fad, or corporate success precisely as that trend, fad, or corporate success has bred the seeds of its own destruction—and Pfizer is Exhibit A of the Cover Story Curse.

[As readers might recall (see “The Last, Best Hope for Prosperity” on June 12), Time Magazine provided the most recent “Cover Story Curse” last summer, when its “Home Sweet Home” cover story (“Why we’re going gaga over real estate”) preceded the top in the house-buying mania by maybe three months.]

And so it was that Pfizer-the Great slowly lost its way, until earlier this year anxious callers to “Mad Money” asked Cramer for advice on their holdings in what had once been regarded as the bluest of blue-chip stocks.

“I am giving you permission to sell Pfizer!” Cramer would scream, slamming the “Sell-Sell-Sell” button and no doubt contributing to the wash-out bottom in the stock, shortly before welcome litigation news and a huge dividend boost sent the stock up, and altered the mood among Pfizer investors from feeling we’re-all-doomed to the more hopeful it’s-not-dead-yet.

And now the Wall Street Journal reports that Pfizer may be preparing to sell the old Warner-Lambert consumer franchise, comprised of Listerine, Visine and other stalwarts that have lately been knocking the cover off the ball in comparison to the drug business.

Numbers being tossed around are as high as $11 billion, and interest is said to be high.

But why stop there? Why stop at selling off $4 billion or so worth of Pfizer’s $50 billion in sales? Why not sell the whole thing? And I don’t mean a merger with, say, P&G or some Big European Drug company.

I mean a good old fashioned leveraged buyout.

The idea is probably as farfetched as it sounds, and the probability is next to nil. I would never buy the stock on the assumption that some private equity group could round up the quarter-trillion or so that it would cost to leverage-up the company.

Also, Pfizer guys are corporate guys—they like the company, they like the lifestyle to which it has accustomed them, and they have probably become too accustomed to being the buyer to ever think about being the seller, despite the fact that they have granted themselves something like a half a billion shares worth of stock options.

And they are probably not the most entrepreneurial management in America.

I say that because I once sat on the train to New York next to a Pfizer executive. He spent the entire train ride—more than an hour—working on his laptop computer moving boxes around on an organizational chart.

I am not making that up.

But a leveraged buyout of the ex-Company of the Year is worth thinking about, if for nothing else than trying to understand the valuation currently accorded to Pfizer on the market.

The math is really pretty simple:

1. Pfizer had EBYYY—“Earnings Before Yadda-Yadda-Yadda”—of around $22 billion last year. (In serious terms, EBYYY is what Wall Street calls “EBITDA”—earnings before non-cash charges, such as depreciation, and capital-related charges, such as interest and taxes.)

2. Pfizer has no debt, net of cash. In fact, Pfizer has a lot of cash, thanks to the repatriation of $30+ billion from overseas entities as part of the so-called “Jobs Act.”

So let’s pretend a leveraged buyout group paid $32 a share for PFE—just pretend. Call it 7.4 billion shares outstanding, and that would cost the buyers $237 billion.

Now, pretend the buyers put up $37 billion of their own equity and borrow the remaining $200 billion, upon which they might theoretically pay, what, 9% interest—about $18 billion annual interest expense?

(Hey, Russian Federation bonds yield roughly 6%—and which credit would you rather own, a country run by an ex-KGB agent or a company whose business is keeping aging Baby-Boomers alive?)

So, under these assumptions, Pfizer’s EBYYY of roughly $22 billion would cover the $18 billion annual interest tab, with $3 billion available for capital expenditures (which amounted to something under $2.5 billion last year) or dividends to the new owners.

Furthermore, the new owners—being rapacious high-leverage types—could immediately set about selling off assets (the Listerine franchise, for example) to the highest bidders, in order to reduce debt or, more likely, pay themselves fat dividends and the kind of “advisory” fees that LBO groups grant themselves once they control the piggy bank.

Far-fetched? Yes.

But here’s the most compelling part: figure that the average LBO generates legal, banking and advisory fees of up to 5% of the value of the deal.

5% of $237 billion is $11.9 billion—$11.9 billion of fees for Wall Street’s lawyers and bankers and analysts!

Dream away! But don’t expect an announcement tomorrow.

Jeff Matthews
I Am, In This Case, Making It Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.