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 The deal also means a major payday for activist investor Carl Icahn,
the second-largest shareholder at Forest Labs, who waged two proxy
battles and threatened a third to change its leadership and
strategy.
Actavis said it would pay the equivalent of $89.48 per share,
representing a premium of 25 percent to Forest's closing price on
Friday. The offer comprises $26.04 in cash and 0.3306 Actavis share
for every Forest share.
Actavis started on its path to the $25 billion deal less than two
years ago. Formerly known as U.S.-based Watson Pharmaceuticals, it
announced a plan to buy Swiss-based Actavis for about $5.6 billion.
It changed its name to Actavis and last year bought Ireland's Warner
Chilcott for $8.5 billion, allowing it to relocate to Dublin, where
it benefits from a significantly lower tax rate.
The new deal grew out of a dinner meeting between Actavis Chief
Executive Officer Paul Bisaro and Forest CEO Brent Saunders during
the JPMorgan Healthcare Conference in San Francisco last month.
"We weren't really thinking about buying or merging or getting
together. It was really 'let's get to know each other a bit,'"
Bisaro said in a telephone interview. "As Brent and I came together
and talked about this, we realized that combined we can actually
grow faster."
The companies completed the deal over the past weekend, helped
Saunders said, by snowstorms that nearly locked up their teams in a
New Jersey hotel. The Forest buyout, expected to close by the middle
of the year, ranks as one of the top five pharma deals of the past
decade.
Actavis shares rose more than 7 percent on Tuesday as investors
backed the latest step in the company's strategy of acquiring
specialty drugmakers to boost profit margins and sales. Shares of
Forest jumped nearly 30 percent.
"This is a huge win for all shareholders of Forest Labs and yet
another validation of the activist investment philosophy in
general," Icahn, who holds an 11.32 percent stake in Forest, said in
a statement. Since the close of trade on Friday, the value of
Icahn's holding has increased by more than $641 million.
Icahn had criticized Forest for being ill-prepared to generate
growth in the face of looming generic competition for its biggest
drugs and for warnings the company had received from U.S. health
regulators about its marketing.
He helped bring about a management change at the company last year,
when longtime Chief Executive Officer Howard Solomon retired and was
replaced by Saunders, a former Bausch & Lomb CEO. In January, the
company delivered quarterly financial results well ahead of
analysts' expectations. Saunders said he expects Icahn to continue
to be a shareholder in the new company.
The deal has a breakup fee of about 3.5 percent of the equity value
of each company, Actavis said.
A SURPRISE DEAL
Actavis expects the deal to add to its profits in the double-digit
percentages in 2015 and 2016, including about $1 billion in tax and
operating savings. The tax savings are about 10 percent of that, or
$100 million, Actavis said.
New York-based Forest, which had a tax rate of 19.5 percent in its
most recent quarter, will pay the combined company's estimated 16
percent rate. Actavis' purchase of Warner Chilcott last year and
move to Dublin helped lower its tax rate from around 28 percent to
17 percent.
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The addition of Forest will boost specialty drugs to represent about
50 percent of combined company revenue, estimated at about $15
billion. North American specialty pharmaceuticals comprise about 30
percent of Actavis' stand-alone revenue now, the company said.
"Overall, this was a bit of a surprise, but we've been expecting
more consolidation in specialty pharma," said Morningstar analyst
Michael Waterhouse. He said Actavis, Teva Pharmaceutical Industries
<TEVA.N> and other generic drugmakers are on the hunt for branded
drugs, such as those for women's health, in which large drugmakers
have lost interest because of poor sales potential.
Forest brings a diverse portfolio of treatments for disorders of the
central nervous system, digestive tract issues and women's health.
Its branded drugs include Bystolic for high blood pressure and
Linzess for patients with irritable bowel syndrome.
It faces patent expirations on several of its biggest drugs,
including next year's lapse of marketing exclusivity for Alzheimer's
treatment Namenda. It is trying to protect that revenue by shifting
patients to a longer-acting form of the drug called Namenda XR,
which has its own patent protection, beginning in August. It also
has an advanced pipeline of new experimental therapies for
infectious disease, lung disorders and schizophrenia.
The status of Namenda may prove tricky for Actavis, which had sought
to sell a generic version of the drug.
"It's a challenging situation," said Siggi Olafsson, president of
Actavis Pharma. "There are a lot of new products out there, but we
know the situation for both sides of the coin."
BMO Capital Markets analyst David Maris cautioned that Actavis may
have trouble managing Forest's sprawling sales force.
"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," Maris wrote in a note to clients. "We acknowledge the
deal frenzy and earnings accretion deal environment, but are not
convinced that such a deal makes strategic sense."
Wellington Management Co is the largest shareholder of Forest with a
13.8 percent stake.
Greenhill & Co <GHL.N> was financial adviser to Actavis, and Latham
& Watkins the legal adviser. Forest was advised by J.P. Morgan Chase
& Co <JPM.N> and Wachtell, Lipton, Rosen & Katz.
(Additional reporting by Natalie Grover,
Paritosh Bansal, Olivia Oran and Ransdell Pierson; editing by
Michele Gershberg, Bernadette Baum and Jonathan Oatis)
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