Zeneca bidders may as well stay in bed

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The Independent Online
It Has been a rare week for Zeneca. There was hardly a whisper about a takeover bid for the pharmaceuticals business spun off from ICI in 1994. Almost from the day it secured its independence there has been gossip and speculation that the Zeneca bid is on its way. Dates, times and the name of the predator have been flashed around the market with a certainty that has been consistently misplaced.

The Zeneca management has grown accustomed to the noisy nonsense. It is not complacent but neither is it distracted from the more important task of developing a business that has rapidly established itself as a great British success story. The story has become much more visible since Zeneca appeared from beneath ICI's skirt tails but still there is a danger that the company is better known for its bid attractions than its investment fundamentals.

Those fundamentals highlight Zeneca's attractions but also demonstrate that a bidder will have to pay a hefty premium to have any chance of success. There are many ways in which you can assess Zeneca's performance. One of the least sophisticated but most effective is simply to see what has happened since its demerger.

The shares were floated at pounds 6. However, that represented a quasi-rights price so we must add on pounds 1 to reflect the discount. At the time of the demerger, the sector was in the doldrums so we must add on another pounds 1 to reflect market sentiment. The real worth of the shares was therefore around pounds 8 at demerger. Since then, profits have, in effect increased by around 2.5 times. Assuming a simple relationship between share price and profit, the shares should today be trading at around pounds 20. They closed on Friday at pounds 17.39, which is a few coppers below the all-time high. On this basis, there is no suggestion that this is a share price propped up by bid speculation. Indeed it is undervalued.

The stock market has a more sophisticated valuation mentality and might object to the crudity of the analysis but not to the ultimate conclusion. Zeneca has a drugs pipeline that is the envy of the industry. It has consistently demonstrated its ability to live up to its potential and its commitment to R&D means value for the future is being accumulated.

Given its record, Zeneca's aspirations deserve to be seen as very achievable targets. The key aspiration is to deliver annual growth in profits of 15 per cent a year over the next five years. That is not unrealistic. The company has strength in depth that makes the proposition viable.

Pharmaceuticals margins are running at around 30 per cent; the agrochemicals margin target has been increased significantly to the 12-18 per cent range; while specialities is lagging towards the bottom of its 8-14 per cent range.

Superimpose on that the sales growth potential of new products such as the Accolate asthma treatment and Amistar, the fungicide using novel chemistry, which threatens to be a agrochemicals blockbuster and goes on sale next year, and it is easy to see how 15 per cent growth is within reach. In anti-cancer, too, Zeneca has a portfolio of new and established products that will help it reach its ambition of being number one in the market. Consensus forecasts suggest a 17 per cent compound annual growth rate to the year 2000.

All this potential makes Zeneca an attractive proposition. But it does not come cheap. With pounds 2bn of net assets and a market capitalisation currently standing at pounds 16bn, a bidder is already looking at goodwill of pounds 14bn to deal with. To be successful, a bid would have to be pitched at around pounds 25 a share. There are few businesses out there who could afford pounds 24bn for a medium-sized pharmaceutical player, which Zeneca - despite its market capitalisation - actually is.

Those banking on a bid have not yet been disappointed by the share performance. Nor will they in the future. Zeneca's price will continue to rise without a takeover.

Don't bank on it

I WAS under the distinct impression that Sainsbury was already a bank. It is a place where you queue interminably and ultimately part company from large sums of money. Now the company that gave us the name check out (you get to the till and write your cheque out) is making it official by seeking a grown-up banking licence.

Marks and Spencer has one, but arch-rival Tesco does not, even though it was quicker off the mark to offer a quasi-banking service.

This all goes to show how the supermarket has become the new focal point for British society: the government even thinks doctors' surgeries could be located there. Whether this has any advantage for supermarket shareholders is another matter. The more distractions, the less time there will be for shopping.

What is most strange is that while the banks have spent the last few years trying to shrug off their banking image everybody else is rushing to become banks. Building societies, the Prudential and now supermarkets all want to become a bunch of bankers. Why?

One thing the high-street clearers have demonstrated is that it takes more than a banking licence to have a satisfied customer base. If Sainsbury sees its banking operation as a profitable way to enhance customer service then that is all to the good. If it is a diversion from the sluggishness of its core supermarket business then it is destined to be a disappointment. There is a big difference between banking as a commodity business, which requires high volumes and high technology, and banking as a financial services business, which requires a high degree of differentiation from everybody else in the market place. On balance, I would prefer Sainsbury to become a better shopkeeper than yet another banker.

Another load of balls

EACH week the National Lottery creates a big bunch of losers. Next year it will be inviting the corporate sector and the economy at large to join the regular army of disappointed punters. A midweek lottery is bound to have an impact on all those companies who compete each week for our meagre amounts of discretionary spending. After the Lottery was launched in November 1994, it had a quite severe impact on bookmakers, bingo operators, retailers, pubs and restaurants during 1995. In 1996, the downturn has worked its way out of the system but a midweek lottery will suck an extra pounds 1.5bn out of the economy. Not good for share prices, the economy or the losers.

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