Actavis Said to Near $25 Billion Deal to Acquire Forest Labs

Feb 18, 2014 6:27 am ET

(Updates with Actavis declining to comment in sixth paragraph.)

Feb. 18 (Bloomberg) -- Actavis Plc, the world’s second- largest generic-drug maker by market value, is close to an agreement to buy Forest Laboratories Inc. for about $25 billion, said a person familiar with the matter.

The acquisition may be announced as early as today U.S. time, said the person, who asked not to be identified as the talks are private. New York-based Forest had a market value of $19.3 billion when trading closed Feb. 14. The Wall Street Journal reported on the deal earlier.

Actavis was the most active buyer of drug companies over the past three years, making $14.4 billion of purchases, according to data compiled by Bloomberg. The company, based in Dublin and run from Parsippany, New Jersey, depends on mergers and acquisitions to sustain earnings growth, since developing new drugs through research and development is so costly, said Ori Hershkovitz, a partner at Sphera Funds Management Ltd., a Tel Aviv-based hedge fund that invests in drugmakers.

“They have promised the market that they would do a large amount of deals to keep the accretion alive,” said Hershkovitz, who doesn’t own Forest or Actavis shares. “If you can’t do a large amount of R&D, there’s only one way to grow and that’s through M&A.”

Icahn Win

Actavis rose 0.1 percent to close at $191.88 on Feb. 14 in New York Stock Exchange trading, giving the company a market value of $33.4 billion. Forest climbed 1.5 percent to $71.39. U.S. markets were closed yesterday for a holiday.

Amanda Kaufman, a spokeswoman for Forest, declined to comment in an e-mail. Elisabet Hjaltadottir, an Actavis spokeswoman in Switzerland, said the company doesn’t comment on rumors.

The acquisition would be a win for billionaire investor Carl Icahn, who gained a board seat at Forest in 2012 and is the second-largest shareholder, according to data compiled by Bloomberg.

Actavis was formerly known as Watson Pharmaceuticals Inc. The company in 2012 acquired Zug, Switzerland-based Actavis and took on the Actavis name. Last year, it purchased Warner Chilcott Plc for $9.2 billion including net debt in a deal that enabled the company to expand in women’s health and urology. That purchase gave the company an Irish corporate domicile that lowered its tax rate to 17 percent from 37 percent.

Forest CEO

If the deal goes through, Forest Laboratories Chief Executive Officer Brent Saunders is expected to lead the combined company, the person said. A $25 billion deal would value Forest at 7.1 times this year’s estimated sales, data compiled by Bloomberg show.

Saunders, the former CEO of Bausch & Lomb Inc., took over leadership of Forest in September with support from Icahn. Forest said last month it reached an agreement to buy Aptalis Pharma Inc. for $2.9 billion to add treatments for gastrointestinal ailments and cystic fibrosis.

With a purchase of Forest, Actavis would add the Alzheimer’s drug Namenda and blood-pressure pill Bystolic to its product lineup.

The purchase fits with Actavis’s desire to expand in branded pharmaceuticals and become less focused on generics, said David Maris, an analyst at BMO Capital Markets in New York. Still, the deal may not make strategic sense, he said.

‘Deal Frenzy’

“In a deal frenzy environment, we believe investors will likely favor this deal, but we wonder whether investors will see the rationale beyond earnings accretion in Actavis making such a large and complicated deal,” he wrote in a report today. “We don’t want to be the grown-ups at the party, but we wonder why Actavis would seek to complete such a large deal when near- and intermediate-term earnings are, in our view, already in a good position.”

Forest is an “excellent” takeover candidate for a larger pharmaceutical company and might get a “huge premium” thanks to its pipeline of drugs, Icahn said in August 2012. The company hasn’t been able to fully realize its potential because of a lack of scale and inefficient sales structure, he said in a letter to Forest shareholders at the time. Forest shares have more than doubled since then.

The drugmaker added an Icahn representative to its board last year to avoid a third proxy fight in as many years. Icahn’s qualms included the potential for the son of then-CEO Howard Solomon, who had held the job for more than 30 years, to succeed him.

Icahn has a track record of investing in drugmakers and profiting from their turnarounds or sales to larger companies. He invested in ImClone Systems Inc., which was sold to Eli Lilly & Co. in 2008 for $6.3 billion, and Genzyme Corp., sold to Sanofi for $19.4 billion in 2011, according to data compiled by Bloomberg. Other Icahn targets include Amylin Pharmaceuticals Inc., which was bought by Bristol-Myers Squibb Co. for $5.1 billion in 2012, and Biogen Idec Inc., whose stock has almost tripled in the past two years, the data show.

--With assistance from Natasha Khan in Hong Kong. Editors: Phil Serafino, Kim McLaughlin