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Wednesday, 01 October 2014

Animal harm

Pfizer spins, but not completely off

Pfizer’s $2.2 billion initial public offering of its animal health unit, Zoetis, should cheer its investors. Would-be buyers of the unit’s stock, however, will want to read the warning labels closely. Super-voting shares could mean Pfizer retains board control even if its stake falls below 50 percent.

The $195 billion pharmaceuticals giant endured a lost decade following the millennium. It bulked up with mega-deals, but the result was sclerosis rather than higher productivity and returns. After about two years of fresh restraint, the results look promising. Pfizer shares have increased nearly 50 percent since it formally announced plans to refocus, triple the gains of the broader market. And for good reason. Pfizer sold its baby formula business for a punchy $12 billion. Separating Zoetis, a profitable and steady division, may also attract new investors. 

Yet Zoetis owners won’t necessarily control their destiny. Pfizer will retain a stake of over 80 percent and its employees will account for five of the nine board members at Zoetis. That’s perfectly sensible as long as the company is a subsidiary. Eventually, Pfizer will probably reduce its stake. Even then, however, any Zoetis shares retained by Pfizer will come with 10 times the voting rights of ordinary stockholders when electing Zoetis directors. That means Pfizer could shrink to a minority owner but still essentially dictate what the firm does.   

Maybe Pfizer will one day distribute all its remaining Zoetis stock to shareholders and render the point irrelevant. And as long as it chooses to keep majority equity control, the dual-class structure is redundant. But there is a large gray area between these two scenarios that should concern potential investors. The dual-class share structure essentially means Pfizer is spinning Zoetis, not spinning it off. 

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Pfizer said on Jan. 17 that it plans to sell 86.1 million shares of Zoetis, its animal health unit, in an initial public offering with an indicated price range of $22 to $25 a share. Zoetis generated $4.2 billion of revenue and $245 million of net income attributable to common stock in 2011.

The stock being offered to the public will be class A shares. Pfizer will retain 413.9 million class B shares. The two classes will have identical rights and voting power, with the exception of electing members of the board of directors, where B shares will have 10 votes and each A share one vote.

Pfizer will exchange shares of Zoetis with underwriters’ affiliates for Pfizer debt. The underwriters will then sell the stock for cash. After the offering, Pfizer may distribute to its shareholders all or part of its remaining stake in Zoetis

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