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After Kraft's Mohn-dah-LEEZ, Prepare for Pfizer's Zô-EH-tis


Shareholders bracing for spinoffs among Dow Jones Industrial Average (^DJI) components should also brush up on their phonetics.

After Kraft Foods (KFT) employees voted on the name Mondelez [Mohn-dah-LEEZ] for its soon to be IPO'ed snacks unit, Pfizer (PFE) said on Thursday that it is preparing an initial public offering of its animal health unit under the name Zoetis [Zô-EH-tis]. Pfizer is preparing to spin the unit in a continued push to focus the world's largest drug maker on its pharmaceutical business.

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In April, Pfizer made a first big step in streamlining its assets by selling its baby nutrition unit to Nestle for $11.85 billion, after CEO Ian Read outlined plans to consolidate the New York-based drugs giant in mid-2011. By selling and spinning non-drugs related assets, Pfizer is attempting to buy back shares and reinvest in its drugs' research and development efforts as some blockbuster drugs like Lipitor go generic.

Pfizer said it expects to provide details regarding the proposed animal health unit IPO as part of its 2012 second quarter earnings announcement.

"Pfizer Animal Health is a dynamic business with strong fundamentals, an expanding and loyal direct customer base, and a proven management team," said Pfizer CEO Read in a Thursday statement.

Read also echoed commitment to launch share buybacks with the proceeds of a prospective sale. "Our focus continues to be on taking the actions that will generate the greatest after-tax value for our shareholders, with share repurchases remaining the case to beat in allocating cash proceeds from the separation."

As a standalone, Zoetis will be a leader in animal vaccines, medicines, and testing equipment, with over 9,000 employees globally and $4.2 billion in 2011 revenue. In April, Bank of America-Merrill Lynch analyst Gregg Gilbert said that if Pfizer's animal health unit were to be divested at a similar price-to-sales multiple as the baby nutrition business bought by Nestle, it could be valued at $16 billion and add a further 7% upside to Pfizer's 2013 EPS.

"[Pfizer] has a number of catalysts in 2012 that have the potential to significantly influence its valuation," wrote Gilbert, citing the animal health unit sale, FDA action on a stroke prevention drug called Eliquis, and the possible approval of tofacitinib for rheumatoid arthritis. He rates shares a buy with a $25 price target.

In April, The Wall Street Journal reported that Pfizer might hire JPMorgan (JPM), Bank of America (BAC), and Morgan Stanley (MS) to lead an initial public offering of its animal vaccine. Pfizer said on Thursday that it expects a spinoff by July 2013 and that it may file a registration statement for the IPO in its second quarter earnings announcement.

While the spinoff will raise cash and streamline Pfizer's business, some analysts have recently questioned the value of Pfizer's previous share buyback attempts. "Our analysis of US large-cap pharma's historic buyback programs indicate that Pfizer's share repurchases have the lowest return when compared with other US large-cap pharmas," wrote Citigroup (C) analyst John Boris in a late May note to clients.

Boris calculates that Pfizer's $66 billion in share buybacks have returned a 18% loss and destroyed roughly $11.7 billion in shareholder value. Instead of buybacks, Boris recommends increasing Pfizer's dividend payout ratio above 40%.

Pfizer's baby nutrition asset sale and animal health IPO -- Bloomberg data show they took in $6.3 billion in revenue -- could mark a wider breakup effort by Read, who has spoken about Pfizer's recommitment to its drug research and development after the loss of Lipitor.

In a March meeting, Goldman Sachs (GS) analyst Jami Rubin wrote in a report that Read hinted at a multi-year breakup of Pfizer far beyond his previously announced divestiture plans. Health care giants Abbott Laboratories (ABT) and Covidien (COV) have been pursuing multi-billion spinoff plans since last year.

"We recently met with Pfizer's CEO Ian Read, who expressed an openness to going further with separations beyond animal health and nutrition if the conditions make sense... This, coupled with the CEO's openness to consider unlocking further value, could create an attractive situation with significant upside," wrote Rubin of the meeting in a March 27 note to clients.

If Pfizer were to undergo a full breakup, Rubin expects it to occur in three parts, with the sale of the company's animal health and nutrition units as just the first step.

After those divestitures, a second step would then be a rationalization of Pfizer's organizational structure with efficiency efforts likely to wrench out a $26 per share stock value, and that is the a big part of the reason why Pfizer appears on Goldman Sachs' "America's conviction buy list."

The final step, a full split of Pfizer's drugs businesses, could come in two to three years' time, with the possibility that the moves drive $5.7 billion in additional sales, adding $0.93 to earnings per share, according to Rubin.

"While 2011 was clearly a transformative year for [Pfizer] with sweeping catalysts that unlocked shareholder value, we continue to see significant and stock-moving catalysts ahead," wrote Rubin.

In 2011, Pfizer saw its profitability rise to a post-recession high of $12.8 billion on sales of nearly $67.5 billion. In Thursday trading, Pfizer shares rose less than 1% to $22.12. Shares are up over 2% year-to-date, in line with the Dow's performance.

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