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Analysts Get Hooked On Watson After Actavis Drugs Deal

NEW YORK ( TheStreet) -- Although Watson Pharmaceuticals' (WPI) acquisition of Swiss generic drug maker Actavis was expected for over a month, a strong reaction to Wednesday's deal shows that analysts are hooked on the drugs maker.

In a push to become a top generics manufacturer with a bolstered presence in fast-growing international markets, Watson Pharmaceuticals is buying Actavis for $5.6 billion. While the price is roughly $1 billion below initial reports of a tie-up -- even when including incentives could push the deal roughly $300 million higher -- analysts are upping their outlook on Watson Pharmaceuticals as a result of higher earnings growth expectations.

Even after shares surged in reaction to Wednesday's merger, many expect bigger gains to come as Watson Pharmaceuticals grows into the third leading generic drug manufacturer, while boosting its profit margins and growth profile.

"In our view, the deal is extremely compelling strategically and financially. It transforms WPI into a global generics leader with new strength in attractive markets, bolsters long-term growth, and creates substantial value for WPI shareholders," wrote Credit Suisse analyst Mike Faerm in a note to clients analyzing the merger.

Faerm boosted his price target for Watson Pharmaceuticals from $73 to $98, a 34% increase, on expectations that the tie-up will add $3.49 to the company's earnings per share by 2015, after benefits are realized. Those expectations reflect far higher EPS growth that Faerm initially forecast when deal rumors were first reported by Reuters in late March, reflecting bullish management projections in yesterday's announcement.

"Several financial aspects of the deal exceeded our (and we think the market's) expectations," added Faerm, noting Watson's forecasts of $300 million in synergies, a 28% tax rate and an interest expense of 4.5%, as a result of the merger.

The deal is structured so that the company will an make initial cash payment of 4.25 billion euros [$5.6 billion] and will deliver a bonus of up to roughly $300 million in 2013 if all M&A targets are met. That would push the deal to roughly $5.9 billion, below initial reports as high as $7.3 billion and expectations by Faerm of a $6.9 billion merger.
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