AH Spin Offs - Sum of parts bigger than whole


Strong organic growth over last 6 quarters, successful new product launches and leading industry position have still fallen short of ensuring Merial remains strategic business unit for Sanofi. This may actually be the good news.

Sanofi confirmed last week of its intentions to explore all options for Merial including an outright sale or a spin off, la Zoetis.

If we are to learn from history and we should, a spin off into standalone business would be far more attractive and “win-win” for shareholders, customers and employees of Merial alike.

Spin offs have and continue to create more value across industries including our animal health. Stellar success of Zoetis since its spin off and listing in late 2013 – has created far higher value for shareholders than it would have, if it still were to be part of larger Pfizer.

A market capitalization of US $ 22.4 5 Billion for Zoetis (12th of Nov 2015; source: www.marketwatch.com) which is approaching the overall size of the AH industry highlights the success of the so far, only spin off in our industry.

Should Merial choose to follow suit, this may well turn out to be trendsetter for the industry. A number of unique advantages could eventually unfold over the long term, such as:

  1. No internal competition for resources: while being part of larger enterprise, small AH businesses have at times lost out on precious internal resources which are generally allocated to larger human pharma business units rather than AH BUs. A standalone business like Zoetis could vigorously pursue growth opportunities without worrying about internal competition for resources

  1. Faster decision making: another significant, strategic advantage an independent, standalone business has is the “shorter chain of command” and “direct decision making” without having to go through the circular, circuitous route of larger management teams at corporate headquarters having not much expertise in animal health in the first place

  1. Unlocking of value – markets at times ‘miss out” on hidden gems inside larger organizations with multiple business units. Merial being one of the most profitable animal health business could be the “crown jewel” industry could discover, were it spin off eventually

  1. Specialist pure play – investors could potentially get a chance to evaluate “pure play” businesses with much more clarity, hitherto not possible when these are part of larger corporates and hidden under layers of financial data, thus ensuring managements to increase focus and deliver higher shareholder value

Should Sanofi opt for a spin off route for Merial – this could have far reaching consequences not only for Merial – but for other AH businesses alike.

A successful listing for Merial, were this to happen would not only bring in rich dividends for shareholders but also create competition of a different dimension (investors’ funds) for Zoetis – current 800 pound gorilla in AH industry.

Over to Merck, Bayer and Eli Lilly for the next round of spin offs in Animal Health Industry.

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