NEW YORK (Real Money) -- Back in November, we speculated that Mylan Laboratories (MYL - Get Report) would be in the M&A mill in 2015. The highly fragmented health care industry was in a frenzied merger mania, led by Valeant (VRX) and Actavis (ACT). We also speculated that Teva Pharmaceuticals (TEVA - Get Report), a longtime industry consolidator, may also join the party.
This morning, Teva proposed acquiring Mylan for $82 a share in cash and stock or a $40 billion valued deal. Mylan's shares are up over $6 on the news to $74, and are up significantly since our November recommendation. While MYL said over the weekend that it was not interested in a deal with TEVA, today's offer clearly puts them in play.
For the time being, we think the risk/reward on Mylan is favorable and we would stay with the name. If MYL ultimately does a deal with TEVA, its stock price will go higher. In order to reject a deal it will need to come up with another alternative that is attractive to shareholders and results in a higher stock price as well.
Either way, we think Mylan will generate a higher stock price for its shareholders in the coming months.
We have also recommended Teva a number of times over the past few years. The stock has had a good run in the past year. While we like it based on the company's own merits here, we think if it is able to pull off the Mylan deal it will be a big plus for Teva shareholders and a big boost to the stock price. Teva commented today it expects the deal to be accretive in the mid-teens in Year One and approach 30% accretive by Year Three.
So in terms of MYL and TEVA, for now stick with both of them.
As the equity market has been rewarding stocks of both the buyer and seller in the health care field, we look for more deals in the upcoming year. Three possible acquisition targets are Express Scripts (ESRX), St. Jude Medical (STJ) and Varian (VAR - Get Report).
We are OK on the valuations of the first two with or without a takeover. Outside of a takeover, VAR is a little expensive for our taste.
Final thought: Bernstein's analyst Geoffrey Porges (who we hold in high regard) wrote a comprehensive piece today making a case for Gilead Sciences (GILD - Get Report) to bid for Vertex (VRTX - Get Report). Both stocks have been acting well on the speculation. We don't know Vertex well, but it might be an interesting speculation for those willing to take on a higher level of risk.
Editor's Note: This article was originally published at 1:05 p.m. EDT on Real Money on April 21.