Johnson & Johnson will acquire Pfizer’s consumer unit for $17 bn

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June 26 : Johnson & Johnson agreed to buy Pfizer Inc.’s consumer health products unit for $16.6 billion, $3.5 billion more after taxes than Pfizer expected. The all-cash transaction adds brands such as Sudafed cold medicine, Listerine mouthwash and Bengay pain cream to a J&J lineup that already has some of the world’s best-known products, including Band-Aid bandages. New York-based Pfizer, the world’s biggest drugmaker and New Jersey-based J&J will close the deal by year’s end, the companies said today.

J&J outbid GlaxoSmithKline Plc and rivals by paying almost double the value JPMorgan analysts initially put on the unit, which had $3.88 billion in sales last year. The purchase expands J&J’s consumer operations by more than a third to $13 billion a year in sales, or almost a quarter of revenue.

Pfizer said it will increase its share buybacks and use funds to develop and acquire new products for its drug division.

“This price seems high, but it also seems like a price from which J&J can extract value,” said Robert Faulkner, an analyst with JMP Securities. “Investors will think that J&J may have lost a little bit of discipline, but they would rather see visibility on earnings growth and deployment of that cash than no action at all.”

David Shedlarz, a Pfizer vice chairman, said the company initially thought the value of a spinoff, which the company estimated at about $10 billion, would be roughly equivalent to that of a sale. The J&J acquisition topped that by about $3.5 billion after taxes, he said.

“We thought, uneducatedly, that selling the unit would be comparable” to the value the company would get from a spinoff, Shedlarz said in a telephone interview today. “We truly untapped a fair amount of value.” “It was a very, very competitive process,” Shedlarz said.

Over 30 months the company expects to invest about $17 billion of the $34 billion in cash it will have after the sale in research and acquisitions, Shedlarz said. The reminder will be used to repurchase shares this year and next, he said.

Johnson & Johnson is well positioned for acquisitions because it has $16.8 billion in cash, according to the company’s last quarterly report, analyst Faulkner said. The 120-year-old company is also the world’s largest maker of medical devices and the second-largest U.S. prescription drugmaker behind Pfizer.

The acquisition will nearly double the size of J&J’s over-the-counter drug business, said Colleen Goggins, head of that company’s consumer products unit.