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Pfizer (PFE): Cheap Short?

22 April 2014 by HCM

The week-end was rich in M&A stories in several sectors, but the eye popping numbers definitely came from healthcare. Activist investor Pershing Square Capital is joining forces with Valeant Pharmaceutical to acquire Botox maker Allergan for a cool $45bln. The other mega deal which could be in the cards involves PFE (Pfizer Inc.) targeting AZN (AstraZeneca Plc). Rumours linking the 2 giants have been on and off for a few months now. With PFE rumoured to be the buyer and its prey being a $100bln company, some have been recommending buying 5 year CDS, arguing that a 25bps risk premium is low enough to make it a cheap option. But one has to look at the upside potential of such strategy, and moving meaningfully the 5 year CDS of a $200bln company requires a lot of additional debt. The amount of protection one has to buy to make the potential return attractive might not make it such a cheap short after all.