A month after rumors began swirling that Watson was readying a deal to buy out Actavis Group hf, the Parsippany, N.J.-based generics giant pounced Wednesday, making the largest acquisition in its history by agreeing to pay €4.25 billion ($5.62 billion) up front for its Icelandic rival.
Shareholders of privately held Actavis could also receive up to 5.5 million shares of Watson common stock at a price of $60 per share should the target hit certain performance targets in 2012. Watson's stock closed at $69.69 per share on Wednesday, up from a $68.60 per share close on Tuesday.
Watson plans to fund the cash portion of the deal through a term loan and senior unsecured notes. It has bridge loan commitments from Bank of America Merrill Lynch and Wells Fargo Bank NA pending completion of the financing. Watson expects to close the deal during the fourth quarter, pending approvals.
The move transforms Watson into the world's third-largest generics company, an entity with a presence in 40 countries and more than 17,000 employees across the globe. Watson expects to now have roughly $8 billion in pro forma revenue in 2012, compared with $4.6 billion in 2011.
The deal will be immediately accretive to Watson's earnings. Including an expected $300 million in annual synergies within three years, Watson expects the acquisition to be more than 30% accretive to its earnings per share in 2013, with accretion accelerating in 2014 through internal growth and additional synergies.
Watson added that the cash flow of the combined business is expected to allow it to pay enough of its debts to achieve a 3 times debt-to-adjusted Ebitda ratio in 2013 and roughly 2 times ratio the year after.
Watson CEO Paul Bisaro has publicly noted Watson's appetite to use M&A to both become more balanced in terms of its generics-versus-branded presence as well as expand geographically. The company has historically been much more conservative on the M&A front than rivals such as the notoriously acquisitive Teva Pharmaceutical Industries Ltd. For example, while Watson's most significant recent purchase prior to Actavis was the $561.8 million acquisition of Greece's Specifar Pharmaceuticals SA -- a May 2011 deal that gave it access to a portfolio of off-patent medications and a sales network in Europe and Greece -- Teva that same month was busy making a $6.8 billion play for Cephalon Inc., beefing up the branded segment of the Israeli giant. Watson has never made an acquisition larger than the $1.9 billion buyout it engineered for Andrx Corp. in 2006 and hasn't made a purchase larger than $1 billion since it paid $1.6 billion for Arrow Group in 2009.
The Actavis deal, however, puts Watson in the game, roughly doubling its revenue and giving it the global scale across several European countries to lessen its dependence on patent cliffs in the U.S., which will produce steadily lower margins for generics due to more and more entrants. Actavis' financials aren't well understood -- the company has been private since 2007. But it has a presence in more than 40 countries and markets more than 1,000 products globally. Its last public documents show that sales outside the U.S. accounted for roughly two-thirds of its total revenue, with a presence in several Eastern European markets that Watson doesn't operate in, such as Bulgaria, Russia, Ukraine and Romania.
Watson said that Actavis posted about $2.5 billion in revenue in 2011.
"In a single, commercially compelling transaction, we more than double Watson's international access and strengthen our commercial position in key established European markets as well as exciting emerging growth markets, including Central and Eastern Europe and Russia," Bisaro said in a statement. "The transaction achieves Watson's stated strategic objective of expanding and diversifying our business into a truly global company."
The U.S. accounted for 84% of Watson's global generics revenue in 2011, with the remaining 16% coming internationally. As such, Watson has been lagging behind Teva, Sandoz (the generics arm of Novartis AG) and Mylan Inc. in terms of its international might and ability to handle the dwindling generics opportunities in the U.S. The international figure will balloon to 40% with the Actavis buyout.
Charles Ruck and Scott Shean of Latham & Watkins LLP provided Watson with legal advice; and Skadden, Arps, Slate, Meagher & Flom LLP's Steven Sunshine and Ingrid Vandenborre advised on the antitrust aspects of the transaction.
Ivan Farman, Paul Donofrio and Chris Seiter of BofA Merrill Lynch are Watson's financial advisers. Ian Bagshaw, Elizabeth Conway and Aisling Zarraga of Linklaters LLP and Clifford Chance LLP are Actavis' legal advisers, while Jitesh Gadhia at Blackstone Advisory Partners and Anthony Whittemore at Deutsche Bank AG are its financial advisers. Jack Bodner of Covington & Burling LLP represented BofA Merrill Lynch. Mark Poulton and Joel Ziff of Cliffords advised Deutsche Bank.
Ken deRegt will retire as head of fixed income at Morgan Stanley and be replaced by Michael Heaney and Robert Rooney. For other updates launch today's Movers & shakers slideshow.
Apax Partners offers $1.1 billion for Rue21, the same teenage fashion chain it took public in 2009. More video