Actavis Plc, Market Cap (as of 21/02/14): $38.35bn
Forest Laboratories Inc, Market Cap (as of 21/02/14): $26.36bn

On February 18th, 2014 the Dublin-based generic drug maker, Actavis PLC, announced an acquisition of the New York-based specialty drug maker, Forest Laboratories Inc, in a $25bn cash-and-equity deal. If successfully completed, the transaction will merge two of the world’s fastest-growing specialty pharmaceutical companies, with combined annual revenues of over $15bn anticipated for 2015.
In the proposed transaction, shareholders of Forest Laboratories will receive 0.3306 shares of Actavis common stock and $26.04 in cash for each share of Forest. The transaction will incorporate an election mechanism that will allow Forest shareholders to elect all-stock or all-cash consideration, subject to proration in accordance with the terms of the merger agreement. The stock component of the consideration is expected to represent a tax-free exchange. The per share consideration represents a premium of approximately 25% over Forest’s stock price, and a premium of approximately 31% over Forest’s 10-day volume weighted average stock price, as of the close of trading on February 14, 2014. Forest shareholders are expected to own approximately 35% of the combined company on a pro forma basis.
The acquisition would represent a great deal for Forest and it seems highly appreciated by its shareholders. Indeed, Carl Icahn, the second largest shareholder in the company (11.4% of Forest’s shares), during an interview, said: “This is a huge win for all shareholders of Forest Labs and yet another validation of the activist investment philosophy in general…an investor that had bought Forest shares on November 16, 2009, the date our investment in the company was first made public, and held those shares through today, would have paid $28.97 per share and realized a total return of 209%”.

The combination of Actavis and Forest is expected to yield double-digit accretion to non-GAAP earnings in 2015 and 2016, with significant annual free cash flow generation of more than $4bn in 2015. Strong cash flow will enable the combined company to rapidly de-lever the balance sheet to under 3.5x debt to pro forma adjusted EBITDA by the end of 2014. The acquisition is also expected to realize approximately $1bn in operating and tax synergies. The tax savings are about 10% of that amount, or $100mm. The combined company will invest over $1bn in R&D on an annual basis. The addition of Forest will boost specialty drugs to represent about 50% of combined company revenue, estimated at about $15bn. It will also enable Actavis to further diversify and expand its Infectious Disease, Respiratory, Cystic Fibrosis and Dermatology specialty drug portfolios.

This is the third big purchase in the last couple of years for Actavis. In 2012, Watson Pharmaceuticals bought Actavis for $6bn and decided to acquire its name. Last year, the company bought Warner Chilcott for about $5bn and acquired a low-rate Irish tax home in the process. This strategy of acquiring competitors, obtaining tax synergies and reducing operating costs through scale efficiencies has proved to work well for Actavis, with its market value tripling in a little more than two years. The pharma sector has been experiencing an industry-wide trend of deal making as generic and specialty drug companies seek future growth by making acquisitions that add new drugs, expand their footprint into new markets and allow them to take advantage of lower-corporate tax rates offered by some foreign countries. Valeant Pharmaceuticals and Endo Health Solutions are among Actavis’ competitors that have also enhanced their market values by acquiring rivals, reducing costs and minimizing taxes. Last year, nine drug makers spent more than $38bn on mergers and acquisitions.
On the day of the deal’s announcement, Forest Laboratories’ share price increased by 29% to $92.33, rising above the $89.48 per share Actavis is offering. Actavis shares jumped 6.9% to $205, after earlier climbing as much as 14% to a new 52-week high of $219. Such strong stock appreciation has triggered speculation of a potential bidding war for Forest Laboratories in case another drug maker, such as the previously linked AstraZeneca, decides it wants to place a rival offer for the company.
Greenhill & Co. is acting as financial advisor to Actavis. J.P. Morgan is serving as financial advisor to Forest Laboratories.

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