Actavis makes pharmaceutical deals look generic. Its $25 billion acquisition of Forest Laboratories follows a familiar formula in the sector. Agitating investor? Check. Low-tax jurisdiction? Check. Buyer’s stock rises? Check. And with over $8 billion of value created, financiers will keep busy with their own merger success.
This is the third big purchase in the last couple of years for the company. In 2012, Watson Pharmaceuticals bought Actavis for nearly $6 billion and took its name. Last year, it absorbed Warner Chilcott for about $5 billion and acquired a low-rate Irish tax home in the process. Investors appreciated the cost savings from those transactions, and are doing so again. Counting today’s 7 percent jump, the market value of Actavis has tripled in just over two years.
The course of action is working. Actavis reckons there will be $1 billion of annual savings available from combining with Forest, and that most can be captured within the first year. Taxed at its low rate and put on a multiple of 10 (the standard multiple applied in valuing a recurring stream of revenue), the present value of the savings would be about $8 billion. That’s more than the $5 billion premium being paid to take control of Forest. If the union can generate more savings, and perhaps additional revenue â€" as Actavis hinted on its call on Tuesday â€" then the deal could be even more profitable.
Activist investors have been catalysts for the drug industry’s alchemy. The billionaire investor Carl Icahn, who owns 11 percent of Forest’s stock, played a role in this instance. His needling prompted the company to install a new chief executive last year, which presumably led to the sale.
Actavis, which is using a big chunk of its own stock to pay for Forest, emphasized that its balance sheet wasn’t stretched and that it planned to grow. That probably means more mergers and acquisitions. It isn’t alone either. Valeant Pharmaceuticals and Endo Health Solutions are among those that have also enhanced their market values by snatching up rivals, slashing costs and minimizing taxes. Throw in the renewed vigor of agitators and the market rewards for sensible acquisitions, and the strategy may become somewhat standardized.
Robert Cyran is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
