Mergers and Acquisitions: Zoetis a Buy on Ackman Stake

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Consolidation in the pharmaceuticals business is going to the dogs. Zoetis (ZTS) stock jumped mid-week after billionaire hedge-fund manager Bill Ackman disclosed a $2 billion stake in the animal-health company.

Zoetis stock NYSE:ZTSThe market always likes it when Bill Ackman or one of the other so-called activist investors targets a company, because it knows the odds of something very shareholder friendly happening — a sale at a big premium, a massive share buyback, a fat dividend hike — are likely in the cards.

Just look at what’s happened to Allergan (AGN) stock this year after Bill Ackman took a $4 billion stake and partnered with Valeant Pharmaceuticals to acquire the botox maker. AGN stock was up about 5% for the-year-to-date before the Ackman/Valeant bid in the spring. But Allergan doesn’t want to sell, and now the drawn-out conflict has AGN stock sitting at a YTD gain of 75%.

As for Ackman’s interest in Zoetis, speculation has it that he would push to sell it to a larger drug company — perhaps even Valeant. Sure, it’s possible Zoetis could just be a Plan B if Ackman fails in his plans for Valeant to buy Allergan. But he’s also interested because the entire pharma industry is in a mergers and acquisitions frenzy as firms scramble to make up for blockbuster drugs going off patent.

Zoetis Joins the M&A Parade

In just a handful of examples, earlier this year AstraZeneca (AZN) acquired privately held Pearl Therapeutics, Germany’s  Bayer’s (BAYRY) bought out Merck’s (MRK) consumer care business, and Novartis (NVS) and GlaxoSmithKline (GSK) swapped about $20 billion in assets. Heck, Zoetis itself was spun off from Pfizer (PFE) only last year.

With so much up for grabs, Ackman should be able to find a buyer for ZTS without too much trouble. And being a major shareholder in Valeant — a serial acquirer — only makes the outcome that much more certain. Whoever winds up owning Zoetis, its days as an independent company are numbered.

True, Zoetis stock lagged the market all year long until the end of summer. Since then, however, it’s been in a steady uptrend — perhaps because Ackman was building a stake? — and now sits at a gain of more than 33% for the year-to-date. Most importantly, there’s probably still more upside to come.

ZTS stock jumped about 9% on the Ackman disclosure, so he’s already made money on this deal, but he will surely want more — and he will be willing to wait.

When it comes to mergers and acquisitions, deals always spawn more deals. With Valeant in his hip pocket and a long list of potential suitors, Zoetis stock can continue to rise thanks to the arbitrageurs alone. You can also bet that whatever happens, Zoetis stock is going to command a premium to current levels.

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As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/11/mergers-acquisitions-zoetis-stock-zts/.

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