Actavis, Warner in buyout talks potentially worth $5B-plus

While Valeant Pharmaceuticals ($VRX) was chatting up Actavis ($ACT) about a potential merger-of-equals, Actavis was apparently mulling a bid for Warner Chilcott, the Irish drugmaker that specializes in women’s health and dermatology. After soaring 20% on news of a possible deal, Warner ‘s market value hit about $4.5 billion, at $18 per share. Analysts figure a price of up to $22, putting the deal value at some $5.5 billion.

After word of their parley leaked, the two companies announced that they are in “early stage discussions” about a “potential business combination transaction.” Actavis could have several reasons for making a deal: Warner’s offerings would beef up an already growing women’s health business; Warner would also bring along its dermatology business, a hot field where Actavis isn’t currently strong; and its Irish domicile could help Actavis reduce its tax burden. Plus, Warner’s branded products would help further Actavis CEO Paul Bisaro’s goal of diversifying outside of the low-margin generics world.

Last but not least, buying Warner could help protect Actavis from further interest from Valeant–provided that’s what Actavis wants, that is. “We kind of have a corporate love triangle with Actavis, Valeant and Warner Chilcott,” Gabelli & Co. analyst Kevin Kedra told Bloomberg. “These two incidents are probably related. It could be to some degree a defensive move, in light of Valeant pursuing” Actavis. Other analysts figure the business rationale is the stronger driver, however.

Warner put itself up for sale last year, but it failed to generate an acceptable bid. The company’s shares gained 20% on the news that Actavis might make an offer, to close at just over $18 on Friday. Actavis itself is just coming off a big deal; it was created in the merger of Actavis and Watson Pharmaceuticals, which took on the Actavis name after the deal closed.

At a price of $20 per share, buying Warner could add up to 35% to Actavis’ 2014 earnings, Leerink Swann analyst Jason Gerberry said. The companies also have some overlapping operations that could be trimmed, delivering about $100 million in cost savings, he said. Plus, moving Actavis brands into Warner’s tax structure–a process that would take time–could be worth even more earnings-wise, Gerberry said.

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