The latest big deal proposed in the pharmaceuticals industry isn’t likely to happen.
Takeda Pharmaceutical TKPYY -0.42% recently approached Dublin-based Shire PLC . SHPG -1.11% It emerged Thursday that the Japanese drug giant has made three separate offers to acquire Shire, the last of which amounted to about $60 billion in stock and cash, but Shire said it has rejected all three offers.
More consolidation among big pharmaceutical companies makes sense given industry pressures, and both companies said separately that deal talks continue. However, there likely isn’t enough room on Takeda’s balance sheet for those talks to bear fruit.
For starters, less than 40% of the latest offer for Shire was in cash, with the rest in new Takeda shares. That isn’t a compelling offer when one considers that Takeda stock has had a negative return over the past five years. Takeda shares are also down sharply since their interest in Shire came to light last month.
More cash would help sweeten the deal, but that may not be a realistic option.
Shire has $19 billion in net debt on its balance sheet, while Takeda has $6 billion. Financing the cash component of the offer could take net debt above four times the combined company’s’ earnings before interest, taxes, depreciation and amortization.
Tellingly, the total value of Takeda’s third offer to buy Shire was only 7% higher than the first. That suggests there isn’t much more wiggle room to meaningfully sweeten its bid.
Shire, which makes the attention deficit disorder drug Adderall and rare disease treatments, trades nearly 40% below its high set in 2015. That is partly because other big acquisitions have put too much debt on the company’s balance sheet.
Reducing that leverage will take time, but could do far more to boost shareholder value than a stretched takeover offer.
Write to Charley Grant at charles.grant@wsj.com