This week Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) announced the resignation of Sigurdur (Siggi) Olafsson, president and CEO of Teva's Global Generic Medicines Group. Olafsson, together with Teva CEO Erez Vigodman, was the moving spirit behind the $38 billion acquisition of Allergan plc's generics division Actavis. The person who had in the past successfully run the acquired company, and who was to have been responsible for the acquisition and the integration of Actavis into Teva, suddenly left.
In my view, this resignation calls for explanation, and my view of the acquisition deal all along has been that the price is too high. Teva's management and its board thought that it was vital even at an inflated price, but look where it has led Teva. From a deal that was supposed to consolidate Teva's position as an independent company, it is liable to turn into a deal that endangers its future.
In the current price environment, and even in that which prevailed at the time the deal was finally approved, Teva would not agree to pay $38 billion for Actavis, especially when most of the consideration is in cash (some $34 billion). The price would not be more than $20-25 billion. The insistence of Teva's management and board on going ahead with the deal at its original value was absurd: Teva bought a company larger in value than itself (at least according to the deal price and Teva's market cap on the date the deal closed), but with much lower sales and much less profitable. The result: Teva now has a market cap of $38 billion, exactly the value of the deal to buy Actavis, and exactly the amount of debt created by the inflated deal, most of it long-term.
Fortunately, the financing for the deal took place in a low interest-rate environment, and Teva managed to obtain especially cheap finance, but might the debt put Teva at risk? Certainly it might, especially if the negative sentiment towards drug companies and the erosion of prices of generic drugs continue.
It seems to me, given the history of Teva and of similar corporations, that the standing of CEO Erez Vigodman has become very shaky. That is quite natural: unless the share price, which has plunged by more than 50% from its peak, recovers, and unless Teva manages to realize the potential that it promised the deal held, and if any risk whatsoever arises to repayment of the massive debt, the shareholders will start to press, and Vigodman will be liable to pay the price.
There are however other responsible parties. The Teva board, headed by Prof. Yitzhak Peterburg, comprises twelve directors. Where exactly were they when the over-priced deal was approved? Why, despite the signals from all around, despite the falling share prices falling p/e ratios in the sector, did they not attempt to reduce the price? Why, for example, did they not propose paying the penalty - $2 billion - and saving $20 billion? Why? Because in the corporate structure that formed, and not just at Teva, directors are sometimes more like marionettes, captive in the hands of dominant managers. The Teva board, it emerges, is very weak (its Israeli members are Vigodman himself, Amir Elstein, Galia Maor, Joseph Nitzani, and Ory Slonim) and did not stand in the way of the company's management as it closed the deal that is liable to undermine Teva's stability.
Published by Globes [online], Israel business news - www.globes-online.com - on December 8, 2016
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