LONDON U.S. drugmaker Pfizer (PFE.N) will need to raise its bid for AstraZeneca (AZN.L) to around $105-110 billion and increase the proportion of cash in the offer to win its British rival, investors believe.
After showing his hand and pressuring his smaller competitor on Monday by disclosing two bid approaches, both of which were rebuffed, Pfizer CEO Ian Read has until May 26 to "put up or shut up" under UK takeover rules.
Importantly, after a jump in Pfizer shares, Read knows he has the backing of many of his own shareholders, while the threat of a counterbid does not appear imminent.
Read and his team will be using the time available to consider how they can sweeten an offer made in January worth 58.8 billion pounds ($98.8 billion), or 46.61 pounds a share, comprising 30 percent cash and 70 percent shares.
AstraZeneca said that offer fell "very significantly" short and it specifically flagged the small cash component, which would leave investors exposed to the risks faced by Pfizer in executing an ambitious mega-merger.
So far, the British group has refused to talk to Pfizer - but it has not ruled out discussions altogether and one person close to the company said the cash component of any fresh offer would be key in determining if there was engagement in future.
Cash is uppermost in the minds of AstraZeneca shareholders, too.
"For it to move forward from here, they (Pfizer) need to find a way of getting Astra management engaged and that feels like it needs a specific value being applied to the group, and it needs the cash element to be higher," said Alastair Gunn of Jupiter Fund Management (JUP.L), which is a top-20 investor in AstraZeneca.
Analysts at Jefferies believe a deal could get done with Pfizer offering a 50/50 split between cash and shares at a price of at least 50 pounds a share.
Several investors contacted by Reuters confirmed they were looking for 50 pounds a share or more, with Neil Veitch of SVM Asset Management predicting an agreed deal somewhere between 52 and 53 pounds.
Because a key goal of the planned takeover is to get the tax advantages of re-domiciling the enlarged group in Britain, there is a limit to how much cash Pfizer can offer, since at least 20 percent of its shareholders are required to be UK-based.
"We estimate Pfizer will need to issue a minimum of around $55 billion in shares to comfortably meet this requirement," Jefferies said.
Based on the original 30 percent cash element, Moody's analyst Michael Levesque said Pfizer could fund the whole of the cash portion with offshore funds.
Pushing the cash element to 50 percent, however, would require taking on some incremental debt.
SORIOT CANVASSES INVESTORS
AstraZeneca CEO Pascal Soriot, whose efforts to revive the firm's drug pipeline have proved a key draw for Pfizer, will now be canvassing the views of shareholders as a "priority", with machinery in place for meetings with big and small investors, two people close to the company said.
Soriot and chairman Leif Johansson will also be weighing strategic alternatives for the drugmaker, including the potential spin-off of non-core therapy areas like infection and neuroscience, as well as possible acquisitions.
But "white knight" counterbidders ready to take on Pfizer are likely to be thin on the ground - not least because few other companies would enjoy the same cost and tax benefits from acquiring AstraZeneca as Pfizer.
Amgen (AMGN.O) is one player for whom an AstraZeneca deal might make sense, since the two companies are co-developing a number of drugs, but a person familiar with the U.S. biotech firm said on Tuesday it was not interested in entering the fray.
French drugmaker Sanofi (SASY.PA) is another company with the heft and M&A experience to consider intervening, yet its CEO Chris Viehbacher said on Tuesday he planned to stick to smaller bolt-on acquisitions.
GlaxoSmithKline (GSK.L), the British company with arguably the greatest potential to extract synergies from buying AstraZeneca, has meanwhile said for several years it is not interested in large deals.
($1 = 0.5950 British Pounds)
(Additional reporting by Anjuli Davies; Editing by Mark Potter)