Watson Pharmaceuticals: Acquisition Of Actavis Creates A Lot Of Value

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Watson Pharmaceuticals (WPI) ended the week 10% higher after the integrated global pharmaceutical company acquired privately held Actavis Group for Euro 4.25 billion.

The Deal

Watson Pharmaceuticals entered into a definitive agreement to acquire Actavis for an upfront payment of Euro 4.25 billion. Shareholders of the Iceland-based Actavis could receive an additional 5.5 million shares of Watson's common stock in 2013, valued at $420 million at Friday's close. The companies expect the transaction to be closed in the fourth quarter of 2012.

The strong cash flows of the combination allows the new entity to reduce the leverage ratio below 3 times debt to adjusted EBITDA by 2013. The deal is expected to be financed by long term loans and senior unsecured notes. Watson has received bridge loan commitments of Bank of America/Merrill Lynch and Wells Fargo. The company expects to maintain its investment grade rating following the acquisition.

Watson Pharmaceuticals

Watson is a generic pharmaceutical company focused on the development, manufacturing and sale of generic pharmaceuticals. Shares of Watson rallied 10% already on the 21st of March when rumors surfaced that Watson was to acquire Actavis for Euro 5.0-5.5 billion in order to achieve economies of scale between the generic drugs manufacturers.


Iceland-based Actavis currently markets over 1,000 products in more than 40 countries. The company has over 300 projects in the pipeline and reported annual revenues in 2011 of $2.5 billion. The company currently employs roughly 10,000 employees which produce 22 billion doses in 2011.


The combined new entity will achieve $300 million in new synergies in three years, predominantly in the area of research & development and selling and general expenses. The acquisition will create the third largest global generics company. Excluding synergies the acquisition will be immediately accreditive to non-GAAP earnings. Including synergies earnings per share could increase 30% by 2013. The combination would employ 17,000 employees worldwide, operate 20 manufacturing centers and operates more than a dozen research and development centers.

"The acquisition of Actavis will create the 3rd largest global generics company, substantially completing Watson's expansion as a leading global generics company", according to CEO Bisaro.


The company ended its fiscal year of 2011 with $224 million in cash and equivalents and operated with $1.07 billion in short and long term debt for a net debt position of roughly $850 million. The company is valued at roughly $9.7 billion which values the firm at 2.1 times annual revenues and 37 times 2011's annual earnings.

Including the acquisition of Actavis, Watson expects pro-forma 2012 revenues of $8 billion. As reported earlier, the acquisition is immediately accreditive to non-GAAP earnings. The international revenues will increase from 16% to 40%.

Currently the company does not pay a dividend.

Investment Thesis
Watson Pharmaceutical has been on a buying spree this year. Besides the large acquisition of Actavis, the company already acquired Australia-based Ascent Pharmahealth for $393 million in cash as recent as January.

Shares have already returned 26% this year and have tripled over the last three years. Shareholders and analysts applaud the move and note that the large financial and strategic synergies can create a lot of value for the combination.

Despite a 25% upwards move so far this year, investors and analysts see a lot more upside potential driven by the massive amount of synergies to be achieved. I am a buyer of the stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.