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Strategies & Market Trends : Speculating in Takeover Targets
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From: richardred2/18/2014 9:05:16 AM
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Big deal toady FRX Forest Labs

Drug Makers in $25 Billion Deal By DAVID GELLES

Dario Cantatore/NYSE Euronext Paul Bisaro, the chairman and chief executive of Actavis, will lead the combined company.
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Updated, 8:30 a.m. |

Actavis said on Tuesday that it had reached an agreement to acquire Forest Laboratories for $25 billion in cash and stock in a deal that would create a huge pharmaceuticals company with heavy exposure to both branded and generic drugs.

The deal marks the biggest deal yet for one of the pharmaceutical industry’s most aggressive buyers, and a major win for Carl C. Icahn, who had been agitating for change at Forest.

Actavis, based in Dublin but operating from Parsippany, N..J., has been an aggressive acquirer of other drug companies. The latest acquisition — its largest by far — will be its seventh since January 2013, according to Standard & Poor’s Capital IQ. The combined revenues of the two fast-growing specialty pharmaceutical companies are expected to be more than $15 billion in 2015, the companies said.

Under the terms of the deal, Forest shareholders will receive $26.04 in cash and 0.3306 of a share of Actaivs or $89.48. That represents a premium of 25 percent from Forest’s closing stock price on Friday. The stock portion of the payment will be tax-free for Actavis.

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Shares of Forest were up more than 30 percent in premarket trading, while Actavis shares were up 12 percent as investors cheered news of the deal.

Actavis has historically been focused on generic drugs, but in recent years has expanded into selling more branded pharmaceuticals. Forest’s best known drugs are Lexapro and Namenda.

“Today we create a new kind of specialty pharmaceutical company, and one that’s really grounded in something different — a generic DNA,” Paul Bisaro, the chairman and chief executive of Actavis, said in a conference call. “We will have a balanced portfolio of branded and generic offerings.”

This is the first major deal Actavis has announced since it completed its takeover of Warner Chilcott last year for about $5 billion. That deal expanded Actavis’ presence in specialty pharmaceuticals, and also allowed it to complete a so-called tax inversion, relocating its headquarters to Ireland and escaping the U.S. tax regime.

One big advantage of tax inversions, besides a lower statutory tax rate, is that deals can become more affordable. Once inverted, companies can more easily use overseas cash to pay for a deal, and the earnings from any acquired company are also taxed at the company’s new, lower rate.

In this case, Forest’s earnings, which had been getting taxed at a higher U.S. rate, will eventually be taxed at the lower Irish rate currently paid by Actavis, which executives estimated to be 16 percent. Tax savings will amount to at least $100 million, the company’s said.

Mr. Bisaro, who will lead the combined company, said that the deal would result in at least $1 billion in pre-tax and tax savings in the first years of the combination.

The deal is a huge win Mr. Icahn, who led an unsuccessful proxy fight at Forest in 2011 before gaining a board seat and has advocated for changes at the drug maker. He owns more than 11 percent of Forest, according to Dec. 31 filings.

“Great result for ALL $FRX (Forest Labs) shareholders,” Mr. Icahn wrote on Twitter. “Proves again that activism works.”

And though Actavis has been known to grow through acquisition, the enlarged company is already pledging to aggressively develop new drugs. The combined company will spend $1 billion in research and development in its first year, executives said, and already has many products in Phase 3 and 2 research.

Actavis said it planned to release its quarterly results as planned on Thursday, but would not hold a conference call to discuss results.

The companies anticipate closing the deal during the middle of next year. The companies does not expect any significant divestitures.

“When you look at the overview of Forest strategy, it will remain alive and well,” said Forest’s chief executive Paul Bisaro on a conference call. “We believe the optionally for future grown is incredible strong.”

Though Actavis has bridge loan commitments from Bank of America Merrill Lynch and Mizuho Bank, Mr. Bisaro said “we are not over levering ourselves” to get this done.

Greenhill & Company and the law firm Latham & Watkins advised Actavis. JPMorgan Chase is serving as financial adviser to Forest, and Wachtell, Lipton, Rosen & Katz is serving as its legal adviser.
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