Actavis Malta could be subject to takeover

Market analysts have dubbed the Actavis plant in Malta as "redundant" and earmarked for possible job layoffs, should its parent company be taken over by pharmaceutical giant Watson Pharmaceuticals, who is reportedly offering US$7 billion to buy it.

According to Wall Street analyst Ronny Gal of Sanford Bernstein: "Actavis is a European-focused generic company with some interesting US assets, but with relatively moderate (about 15%) exposure to emerging markets. As the EU markets are growing at three to five percent in the longer term - and facing near-term price risk - this is not a growth-focused move by Watson Pharma."

In an investors note he posted on Sanford Bernstein's website, Gal said: "Watson may close off other options with this deal. Assuming a US$7.5 billion price, it will wind up with a 'fairly high' debt ratio," which he believes would "preclude other material acquisitions" in the near term.

Nonetheless, he opines the purchase could make financial sense. Watson could improve its tax rate, and "save money by eliminating jobs and closing redundant factories. He points to plants in Malta, India or China, or an Actavis facility in New Jersey, where costs are presumably higher."

However, Ronny Gal points to what he describes as a "likely advantage for Watson" where Actavis' former chief executive and today company head of generic business Ziggy Olafsson, said that "the odds are low that Watson will find an unforeseen disaster in Actavis".

Gal says that the possible take-over is a 'bird in the hand' situation, where question is the price to be paid by Watson Pharmaceuticals and the profitability of the asset, which so far remains unknown.

Shibani Malhotra of RBC Capital Markets wrote in an investor note that the deal "makes sense, strategically" because Watson would achieve a goal of expanding its global reach and grow foreign revenues to roughly 40 to 50% of company-wide sales, up from about 20% today.

"We also prefer the acquisition of a global generic company to Watson's acquiring a branded company, as we believe there is value in a pure play, focused generics business model," she added.

Details remain unclear, but assuming a US$6.9 billion acquisition price, which she describes as the midpoint of the possibilities, Malhotra looks for the deal to include 85% debt financing with the remainder coming from equity financing component. And she expects "peak synergies" of 15% of spending on R&D and sales, general and administrative costs to be achieved by 2014.

Meanwhile, Michael Faerm of Credit Suisse offers believes a deal would "substantially" boost Watson's presence in Central and Eastern Europe, which the drug-maker has been targeting.

He estimates that about 40% of Actavis revenues are generated in these regions, based on figures released in 2008.

Actavis has been private since 2005, so analysts are ball-parking some estimates more than usual, although it notched US$2.4 billion in revenue last year.

In addition, he sees this expanding Watson's "platform" with five manufacturing sites in Asia, including two in China, two in India and one in Jakarta. And, he writes in another investor note, that Asia revenues were only two percent of total sales in 2008, "but the mix of higher value, non-commodity products fits Watson's strategy and enhances this strength".