A week after rumors of a Valeant ($VRX) takeover sent shares of Zoetis ($ZTS) flying 11% to an all-time high of $55.48--and then crashing right back down when no bid emerged--investors have been given another tantalizing scenario to ponder about the much-discussed animal health giant. On June 29, Canaccord Genuity analyst Mark Massaro published a report suggesting Zoetis might have both the resources and the desire to acquire veterinary diagnostics maker IDEXX ($IDXX).
Massaro notes that Zoetis has expressed interest in expanding its presence in diagnostics, according to Benzinga.com, which obtained a copy of his report. Furthermore, Massaro says, IDEXX has been transitioning to an all-direct sales model--a model that Zoetis supports--and its head of sales is a Zoetis veteran. With a $24 billion market cap and $600 million in cash, Massaro concludes, "we think Zoetis could make a bid for IDEXX."
That's not to say the speculation that Zoetis itself might be gobbled up has completely dissipated. Jeffrey Holford, an analyst for Jefferies, has named Bayer as a "logical and motivated" potential buyer of Zoetis, according to the Financial Times. Indeed, Bayer CEO Marijn Dekkers has often expressed a desire to expand his company's animal-health business, and the expected divestiture of Bayer MaterialScience could very well provide the capital for a big acquisition.
Recently, Dekkers has backed off a bit, though, telling Bernstein analyst Ronny Gal recently that Bayer has its hands full with other recent acquisitions, including its $14 billion purchase of Merck's ($MRK) OTC unit.
The speculation surrounding Zoetis's potential as a takeover target started late last year, when activist hedge fund investor William Ackman of Pershing Square Capital bought up an 8% stake of the company and reportedly began pressuring executives to put it on the block. Zoetis responded by making drastic moves to cut costs, including eliminating 5,000 underperforming SKUs and exiting 10 manufacturing plants. CEO Juan Ramón Alaix vowed to refocus the company's R&D efforts on products most likely to deliver the highest returns.
Meanwhile, Zoetis continues to attract investors. Even after last week's drop, the company's shares are up more than 12% this year, beating the S&P 500 and attracting many more hedge funds, notes Seeking Alpha. Among the company's notable hedge fund investors are George Soros, Renaissance Technologies and James Dinan's York Capital Management. Several hedge funds boosted their positions in Zoetis in the first quarter, according to Seeking Alpha.