Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) management, headed by CEO Erez Vigodman, did everything possible yesterday to convince the public that the largest acquisition in its history - the acquisition of Actavis, Allergan's generic division, for $40.5 billion - was still as attractive for Teva as it had been when first announced in July 2015.
In a conference call yesterday after the publication of its first quarter financial statements, Teva executives again stressed the acquisition's expected strategic value. Doubts have arisen in recent days in the market concerning the acquisition, after pharma share prices plunged and it was reported that Teva would have to sell production lines worth $2 billion in order to obtain regulatory approval for the deal (this report caused a steep drop in the Teva share on Friday).
Teva yesterday announced that the value of the business it would actually have to sell was $1.1 billion, only a little more than the market initially expected. Teva also reiterated its commitment to achieving synergy worth $1.4 billion within a year of the acquisition, even after the sale of product lines.
From this standpoint, the investors may be able to feel more comfortable with the deal, but the question of value and multiples remains. In order to give an indication, when Teva announced its acquisition of Actavis last July, Allergan's entire market cap was $121 billion, and Actavis's value was a third of that. Allergan's market cap has now fallen by almost a third to $84.4 billion, meaning that the price that Teva will have to pay for is equal to almost half of Allergan's current market cap. In other words, while the market cap of companies in the sector - Allergan, Teva, Mylan N.V. (Nasdaq: MYL; TASE: MYL), Perrigo Company (NYSE:PRGO; TASE:PRGO), and quite a few other drug companies - has shrunk dramatically in recent months, the acquisition price remains constant. At the current market price, Teva would probably not have paid the price it has taken on itself.
Vigodman: The strategic value remains"
Before it acquired Allergan, Teva attempted a takeover of Mylan, offering $82 per Mylan share, amounting to a total of $40 billion. The Mylan share is currently traded at about half the value Teva was willing to pay for it - at a market cap of $20.7 billion.
Fortunately for Teva, the deal (opposed by Mylan management), did not go through, but before the Israeli company abandoned it in favor of the Actavis acquisition, it had acquired 4.6% of Mylan's shares on the open market for $1.6 billion as a preliminary to its takeover attempt.
The Mylan share price fell as soon as Teva stopped trying to acquire the company, and continued its descent, and is therefore still exerting a negative impact on Teva's current financial results. Teva recognized a $400 million loss on its investment in Mylan shares in 2015. The reports published yesterday show that Teva recognized a further $200 million loss in its balance sheet in the first quarter of 2016 caused by the drop in Mylan's market value. In other words, Teva has lost $600 million on paper to date on its takeover attempt.
Yesterday, after its reports were published, Teva executives were asked, "Do you still believe that the price you are paying for Allergan is a fair price in the current situation?" Vigodman's firm answer was, "The answer is a definite yes. The strategic value of the deal is at least as much as it was when we announced it. The opportunities in the generic market in the US and worldwide are enormous. We very much believe that with everything that we are seeing today, the opportunities for Teva are even greater."
When Teva announced the acquisition, it reported that Actavis would contribute $2.7 billion to its earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2016. The delay in completing the deal is reducing the extent of the contribution expected this year. In yesterday's conference call, Teva CFO Eyal Desheh explained in this context that the original expectation included a whole year's contribution, and now only half a year was involved. He said, "It is not linear. Less can be achieved in six months. You have to regard 2016 as a transitional year; the real test will be in 2017."
In the context of financing for the deal, Desheh noted that the plan remained unchanged. Teva may not need the entire $27 billion allocated in bridging bank loans. The plan is to raise debt in the fourth quarter, and Deshe said, "We see a very good environment for bonds, with low interest rates, and we hope it will stay that way."
Published by Globes [online], Israel business news - www.globes-online.com - on May 10, 2016
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