ZTS - Zoetis Inc

[fareastwarriors]

Hi,

 

Have anyone looked at this Pfizer spin off? I haven't looked at it too closely yet since it has been crazy at work. I might need to put something together for a sell case. 

 

 

Zoetis Inc., the animal-health company owned by Pfizer Inc. (PFE), surged 19 percent in its debut after raising $2.24 billion in an initial public offering, pricing the shares above the proposed range.

...

Pfizer offered about 17 percent of Zoetis in the IPO, the biggest in the U.S. since Facebook Inc.’s last year. The IPO price valued Zoetis at $13 billion, making it the largest public company of its kind and one of the few focused solely on medicines for animals. Pfizer could exchange the rest of its holdings in six to nine months

...

 

 

http://www.bloomberg.com/news/2013-01-31/pfizer-s-zoetis-raises-2-24-billion-pricing-ipo-above-range.html

 

 

 

link to Prospectus:

http://www.sec.gov/Archives/edgar/data/1555280/000119312513035094/d381653d424b4.htm

[handycap5]

here is my best guess at pscm and sachem involvement with ZTS. but i would appreciate others thoughts:

1) CEO doesn't sound good. financial goals are very modest and board looks pretty weak on the surface. So make changes here.

2) wall street polls estimate EPS of $2.20 in 2017. Cutting opex by 1/4 would add 70-80 cents. Getting the tax rate from 29% to 20%, would add a further 40 cents. So maybe EPS of $3.40 in 2017.

3) the limits of a sale of the company for tax reasons (spin/IPO was 1.31.14) are probably gone, so the company may be sold. wouldn't everyone who ever thought of buying into this business be working on it starting tonight?

 

does anyone have any further thoughts?

[Liberty]

I think Ackman's goal is to have ZTS be acquired by VRX.

 

Based on everything that Ackman has been saying about Valeant, he clearly thinks Pearson is a special CEO (all the Outsiders references) and that while the Valeant model isn't complex, it's very hard to execute well. Chances of ZTS reforming itself are a lot lower than having the guys who've shown they can do it take over.

 

ZTS SGA is low 30s, VRX is low 20s. ZTS tax is almost 30%, VRX has cash tax of mid single digit. So if VRX could just bring SGA and tax down, rationalize R&D, and then in the longer term maybe use ZTS as a platform to buy mode animal health assets, this seems like a lot more potential value creation than having ZTS on its own with unproven management.

 

IMO Pearson is Ackman's Tom Murphy.  Ackman's going to try to feed him as many assets as possible and facilitate his deals.

[dwy000]

It's hard to believe Ackman would put $2bn into anything without having an end game (and a plan to get there).  It seems logical to feed that to Valiant assuming the R&D and SG&A can be cut sufficiently to make it work.

 

There's just something a bit uneasy about the whole situation though.  Kinda like insider trading but not really.  You can smell the lawsuits to follow.

[VersaillesinNY]

Last February, I opened a small position in Zoetis at $ 29.55

Spinoffs like ZTS & CWGL are interesting because Wall Street doesn’t pay much attention to them.

It’s worth revisiting Seth Klarman’s views on spinoffs (Margin Of Safety, page 177).

 

Here are some of my superficial notes on Zoetis:

 

- Animal medicines & vaccines is a growth market with good margins.

- ZTS is a leader in its industry.

- The Spanish CEO, Juan Ramon Alaix has a good background and is shareholder oriented.

- Zoetis sells directly to farmers & veterinarians.

- Diversified medicines with a global presence, sales over 120 countries and expanding.

- Medicines & vaccines for animals get a faster approval from regulators than the ones for humans.

- ZTS has increased its dividend payment rate.

- Large R&D spending around $ 400 M/year.

- As a Pfizer spinoff, they seem to have a good corporate governance and transparent accounting.

- Some people like their animals more than humans and care about their health.

- Soros fund has been building a modest position in ZTS over several quarters.

 

I have no idea of Ackman’s intentions, but it’s going to be interesting to follow the next chapter.

 

Spinoff shares are likely to initially trade at depressed prices, making them of special interest to value investors. Moreover, unlike most other securities, when shares of a spinoff are being dumped on the market, it is not because the sellers know more than the buyers. In fact, it is fairly clear that they know a lot less.

Seth Klarman - Margin of Safety

 

Edit: The CEO of Zoetis on How He Prepared for the Top Job

 

https://hbr.org/2014/06/the-ceo-of-zoetis-on-how-he-prepared-for-the-top-job

 

Zoetis the hidden value of Pfizer - interview in Spanish

 

http://economia.elpais.com/economia/2014/02/28/actualidad/1393606928_894954.html

 

Code Name ‘Superman’: Details on Ackman’s Zoetis Position Revealed

 

http://blogs.wsj.com/moneybeat/2014/11/12/code-name-superman-details-on-ackmans-zoetis-position-revealed/

 

 

[VersaillesinNY]

Ackman's Pershing views on Zoetis:

 

Zoetis, Inc. (ZTS)

On November 11th , Pershing Square announced an investment in Zoetis, the world leader in

animal healthcare products, alongside Sachem Head Capital. Our collective investment

represents an approximate 10% stake in the company.

 

Until 2013, Zoetis was a non-core subsidiary of Pfizer, whose primary business is human, not

animal, health. In January 2013, Pfizer completed an initial public offering of a 20% stake in

Zoetis. The separation from Pfizer was completed in June 2013, when Pfizer split-off its

remaining 80% ownership to its shareholders. This separation resulted in the creation of the only

large independent and publicly traded animal health company in the world. The company has a

market capitalization of $22 billion with approximately $4.7 billion of revenue expected this

year.

 

Zoetis’ business model passes Pershing Square’s high bar for business quality. Zoetis

participates in markets with strong secular growth, driven by global increases in protein

consumption, pet ownership, and the use of medicines to treat pets and livestock. As a result, the

global animal health market has grown at an average of about 4% since 2008 and has

experienced positive volume growth every year since 2003. Historically, Zoetis’ organic growth

has exceeded the industry average. Zoetis’ revenue growth last quarter, currency adjusted, was

10%, above our expectations for long-term future growth.

 

Zoetis’ product portfolio is highly durable. Unlike many human health businesses, Zoetis’

business model is not based on bringing new products to market to compensate for the loss of

patent exclusivity in its existing portfolio. Despite over 80% of its products lacking patent

protection, generic competition in markets where Zoetis competes is minimal.

 

A number of factors contribute to the success of branded products in the animal health industry.

One of the most important contributors is the small size of animal health products. Only about

20 products in the industry have sales exceeding $100 million, with the majority of products

having sales significantly below this level. In addition, gross margins of branded animal health

products are lower than branded human health products. This combination of smaller products

and lower gross margins has made it difficult for generic manufacturers to compete in the animal

health market. Other factors that have contributed to the success of branded products include the

lack of third-party payers in the animal health market and the fact that pet veterinarians directly

dispense drugs to their customers.

 

We believe Zoetis is a scarce asset, similar to our investment in Beam, which was acquired

earlier this year in a large premium transaction. News reports indicate that Pfizer considered

selling Zoetis in late 2012 and that several large, well-capitalized buyers, including Bayer and

Novartis, participated in the sales process. In part because a sale would have triggered large

taxes for Pfizer, Pfizer instead decided to pursue a tax-free split-off of Zoetis to its shareholders.

 

We look forward to beginning a dialogue with Zoetis’ management and board, as we work

together to maximize value for Zoetis shareholders.

 

http://pershingsquareholdings.com/media/2014/09/Pershing-Square-Holdings-Ltd.-Q3Investor-Letter.pdf