Actavis $25B Forest Labs Deal Not Just About Carl Icahn

Updated from 9:55 a.m. to include analyst commentary and closing share prices.

NEW YORK (TheStreet) -- Carl Icahn's efforts as an activist investor in Forest Laboratories (FRX) may have laid the foundation for the company's $25 billion takeover by Actavis (ACT), a specialty pharmaceuticals powerhouse with a growing share of the generic drug market. However, the merger also has to do with corporate shape shifting that changed Actavis's name and put its headquarters in Dublin, Ireland.

In fact, the most important story for investors in Tuesday's deal, one of the biggest pharmaceutical mergers since Pfizer (PFE) bought Wyeth in 2009, may be about Actavis's move from Parsippany, N.J. to Dublin and not corporate activism. After finding its way into Ireland, Actavis is poised to prove that tax efficiency may be one of the biggest factors driving M&A in 2014.

Actavis, by way of its predecessor entity Watson Pharmaceuticals, was founded in 1985 by an immigrant Purdue University Ph.D., Allen Chao, and a colleague, David S. Hsia, with a few million dollars raised by friends and family in the Taiwanese community living in California.

In 2012, Watson Pharmaceuticals acquired Actavis, a Swiss competitor in the generic drugs market. While Watson was the acquirer, the company nevertheless changed its name to Actavis. Watson also changed its ticker on the New York Stock Exchange from 'WPI' to 'ACT' in 2013 and hence Actavis, a U.S.-European conglomerate, was born.

In September 2013, Actavis then bought Dublin-based Warner Chilcott for $8.5 billion, in an all-stock transaction that allowed the company to move its headquarters in Dublin. TheStreet profiled Actavis's corporate shape shifting in that deal.

While Watson's legacy businesses lost their name and their home through the company's acquisitiveness in 2012 and 2013, they nevertheless entered 2014 representing about 50% of "New Actavis's" overall pro-forma revenue. Actavis's tax rate fell to about 17% following the acquisition of Warner Chilcott, according to calculations from analysts at Credit Suisse.

Now, Dublin-based Actavis is buying New York-based Forest Labs. There's a lot for investors to celebrate.

A Victory Lap for Carl Icahn

Carl Icahn, a billionaire activist investor who took a stake in Forest Labs in 2009 and called for the company to change its management and strategy, commended Tuesday's deal on a Web site he created to extoll the virtues of corporate activism.

Icahn ran two proxy contests at Forest Labs, arguing that the company hadn't prepared for the expiration of its drug patents and needed to either be acquired or much larger to succeed. His third proxy contest was avoided when Forest Labs allowed Icahn to elect two new directors to the company's board. In a Tuesday Web post, Icahn also said he was instrumental in bringing Bret Saunders on as Forest Labs' CEO in 2013.

Icahn first disclosed an investment in Forest Labs in November 2009 when the company's shares were trading at about $28.97 a share. Tuesday's takeover by Actavis in a cash and stock deal will give Forest Labs a cash and equity value of $89.48. Actavis's Tuesday stock surge indicates that the deal's ultimate value may be far higher.

Tuesday's deal is certainly a coup for Carl Icahn. Investors following Icahn into Forest Labs shares outperformed the S&P 500 and saw almost $17 billion in rising market value, he said.

A Taxing Strategy

Still, the merits of the deal may be more about corporate synergy and particularly the tax synergies that can be realized when an Irish company with U.S. roots buys a U.S.-based competitor.

Bank of America Merrill Lynch analysts said on Tuesday that Actavis's acquisition of Forest signaled "a new kind of Big Pharma company." The analysts pointed in a research note to clients the combined company's diversity of business mix between branded, generic and biosimilar drugs, its geography, and a more targeted R&D strategy.

"Therefore, this combination, which will also benefit from meaningful cost and tax synergies, is conceptually appealing to us," the analysts wrote.

Leerink Swann analysts said that the majority of synergies will come from SG&A. The analysts also said Actavis is likely to further scale its cost structure beyond the guided cost synergies presented by management.

Actavis said on Tuesday that the merger is expected to yield a double-digit boost to non-GAAP earnings in 2015 and 2016, and will allow the merged entity to generate $4 billion in annual free cash flow by 2015, enabling it to rapidly de-lever from acquisition-related debts.

The tie-up also has the potential to realize approximately $1 billion in operating and tax synergies before any manufacturing synergies or revenue synergies, Actavis said.

"With this strategic combination, we create an innovative new model in specialty pharmaceuticals leadership, with size and scale, a balanced offering of strong brands and generics, a focus on strategic, lower-risk drug development, and - most important - the ability to drive sustainable organic growth," Paul Bisaro, Chairman and CEO of Actavis, said in a statement.

"In five short years, my management team has transformed Watson, and now Actavis, from a U.S. generics company to a leader on the global specialty pharmaceutical stage. Brent and his team, in a short period, have made dramatic progress in rejuvenating Forest into a leader in North American brands," he added.

Actavis was one of TheStreet's Top 5 Corporate Dealmakers Heading into 2014

A Newer, New Actavis

Bisaro will lead the integration of Forest and Actavis. Three members of the Forest board of directors will be named to the Actavis board following the close of the transaction. The combined company is forecast by management to have annual revenue of $15 billion and will commit to investing about $1 billion a year in R&D.

In the merger, shareholders of Forest will receive 0.3306 shares of Actavis common stock and $26.04 in cash for each share of their shares. The deal will include an election mechanism for Forest shareholders to elect all-stock or all-cash consideration, with the stock consideration expected to represent a tax-free exchange. Forest shareholders are expected to own approximately 35% of the combined company on a pro forma basis.

Actavis shares rose 5% on Tuesday to $201.47 a share. Forest Labs shares closed higher by over 27% in Tuesday trading at $91.04.

Greenhill & Co. is financial advisor to Actavis, and Latham & Watkins is Actavis' legal advisor. J.P. Morgan is advisor to Forest, and Wachtell, Lipton, Rosen & Katz is Forest's legal advisor.

Actavis also has bridge loan commitments from BofA Merrill Lynch and Mizuho Bank pending execution of its final financing plans, the company said.

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