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Undervalued Baxalta Inc (BXLT) Shares Target of Acquisition by Shire PLC (ADR) (SHPG)

Baxalta Inc (NYSE:BXLT) was recently spun-off from Baxter International Inc (NYSE:BAX) on July 1st, 2015. The company has 16,000 employees and around $6 billion in expected revenues. Hedge funds are big investors in spinoff stocks because academic studies found that these stocks historically outperformed the market by double digits. Some of the successful hedge fund managers such as Zach Schreiber, Rob Citrone, and Sam Isaly initiated brand new positions in Baxter during the first quarter to take get exposure to this special situations play.

Baxalta is expected to have around $2.15 in earnings-per-share in its first full fiscal year. The company has traded around $32 a share since the spin-off. This translates to a price-to-earnings ratio of just under 15.

Gilead GILD pharmacist store examing pharmaceutical stocks medical

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The typical biopharmaceutical stock trades for significantly higher multiples. Many of the company’s peers trade for price-to-earnings multiples well over 20.

Baxalta Inc (NYSE:BXLT) appeared significantly undervalued. The stock inherited a long dividend history from Baxter International Inc (NYSE:BAX) and management confirmed it would continue making the dividend a priority. Baxalta’s combination of value, solid growth prospects, and continued dividend payments made the stock a favorite of the Sure Dividend system.

Baxalta was the 2nd highest ranked stock in the July 2015 Sure Dividend newsletter. Click here to learn more about the Sure Dividend newsletter. On July 5th the newsletter had this to say about Baxalta:

“Baxalta’s high expected total returns and competitive advantage should give the company a P/E ratio above the S&P 500’s. Fortunately for shareholders, Baxalta’s P/E ratio is still low at around 13.3. The company’s P/E ratio is being suppressed due to selling from the recent spin-off. Now is an excellent time to buy into this high quality pharmaceutical business, while the P/E ratio is still low.”

It was an excellent time to buy into Baxalta.

Yesterday morning, Shire PLC (ADR) (NASDAQ:SHPG) announced they had offered to acquire Baxalta for $45.23 a share on July 10th. Baxalta’s management did not accept the offer. At a price of $45.23 a share, Baxalta would have a price-to-earnings ratio of 21, which is closer to its peer average and around fair value for a high quality dividend growth stock.

Obviously, Shire would not offer more money than it felt Baxalta was worth. Shire’s announcement confirms Baxalta’s undervalued status.

News of the potential acquisition pushed Baxalta’s share price higher. The company’s stock price surged over 12% as investors take notice of Baxalta’s potential and factor in the possibility the stock could soon be acquired.

Reason for Shire’s Announcement

Shire PLC (ADR) (NASDAQ:SHPG) did not announce its acquisition plans because it wants to push Baxalta’s share price higher. Rather, the company is attempting to put pressure on Baxalta’s management to accept an offer.

Shire’s press release stated that “Baxalta has declined to engage in substantive discussions regarding the proposal”.

Shire PLC (ADR) (NASDAQ:SHPG) is attempting to force Baxalta’s hand into negotiating to sell the company. It makes management look less-than-stellar when they refuse to engage in negotiations to sell a business – especially when the sale would be accretive to Baxalta shareholders.

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