Actavis Inc. (ACT:US) rejected a cash-and-stock offer from fellow generic-drug maker Mylan Inc. for about $15 billion, deciding instead to pursue talks to take over Warner Chilcott Plc (WCRX:US), said people familiar with the matter.
The Mylan offer (MYL:US) valued Actavis at $120 a share and would have created the world’s largest generic-drug maker, said the people, who asked not to be named because the discussions were private. Mylan and Warner Chilcott approached Actavis in to discuss potential deals when news of merger talks with Valeant Pharmaceuticals International Inc. (VRX) leaked, said these people.
Chief Executive Officer Paul Bisaro has put Actavis -- formerly Watson Pharmaceuticals -- on an expansionary path, announcing plans to push the generics business worldwide and to buy and develop brand-name drug assets with bigger profit margins. Investors have rewarded the company and the stock has about tripled since Bisaro took over in September 2007.
The company’s cash flow and margins make Actavis an attractive target for Mylan, said Ronny Gal, an analyst with Sanford C. Bernstein & Co. “I like the cash flow but I don’t like the strategic basis,” he said in a telephone interview. Gal has an outperform rating on the stock.
Actavis’s strength “has been to very smartly select products to challenge, and then develop a few products that are very difficult to formulate,” Gal said. “It depends largely on management talent. If you buy the company, they go away.”
Warner Chilcott Deal
Actavis, based in Parsippany, New Jersey, is discussing a bid of more than $5 billion for Warner Chilcott, said another person. A deal could be completed in the next couple of weeks, that person said.
Mylan, based in Canonsburg, Pennsylvania, made its offer in a letter to Actavis on May 7 that emphasized the cost savings that two large generic drugmakers could get by merging, one of the people said. Actavis rejected the offer, in which Mylan was offering more stock than cash, a couple of days later, the person said.
Mylan’s bid for Actavis was worth $15.3 billion based on the shares outstanding when the proposal went to the company on May 7. Based on Actavis’s shares outstanding of 133.3 million, updated today, the bid would be worth $16 billion.
Actavis shares rose 1 percent to $121.68 at the close in New York. Mylan advanced 3.1 percent to $30.10, while Dublin-based Warner Chilcott was little changed at $18.92.
Gal said a deal for Mylan to buy Actavis is still likely, in part because the savings are large enough, and the current cost of capital is low enough, to help drive it through.
“My guess is it’s hard for a transaction not to occur,” he said. “What we’re seeing here is the bankers are going to the companies and saying, ‘look interest rates are at record lows now, and with the end of quantitative easing in sight, this is the last chance to buy a bigger house.’ ”
The letter to Actavis said the deal would be “highly accretive,” said a person familiar with the letter. Mylan was making an offer with mostly stock in an effort to maintain its current credit rating, another person said.
Gal agreed with that assessment. “The overlap is significant,” he said, estimating a combined company may cut about 20 percent of its costs.
Teva Pharmaceutical Industries Ltd. (TEVA), an Israel-based drug company, has also looked at Actavis, said one of the people. Teva is more keen on smaller acquisitions and isn’t likely to pursue a bid, one of the people said.
Representatives at Mylan, Teva and Actavis declined to comment. An official at Warner Chilcott didn’t immediately return a call seeking comment.
More than a year ago, Warner Chilcott disclosed that it was in discussions with suitors and conducting a strategic review. Actavis was among those that considered an offer for the company during that process, said another person.
In August, Warner Chilcott revealed that the talks had ended and that it would renew a share-buyback program and pay a special dividend, saying the measures would be more rewarding for shareholders.
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