Warner Chilcott, a Rare Winner as an Acquirer (WCRX, PG)
This morning’s merger announcement where The Procter & Gamble Company (NYSE: PG) announced the sale of its global pharmaceuticals business to Warner Chilcott plc (NASDAQ: WCRX) was a strange deal for more than one reason. For starters, this is entirely a cash payment of a sum of $3.1 billion. Another issue is that very few consider P&G as a having a drug company, but more strange is that the acquirer saw its stock rise substantially. P&G’s portfolio of branded pharmaceutical products includes the following:
- Asacol® HD (mesalamine) Delayed-Release Tablets for ulcerative colitis,
- Actonel® (risedronate sodium) for osteoporosis,
- the co-promotion rights to Enablex® (darifenacin) for the treatment of overactive bladder,
- and P&G’s prescription drug product pipeline and manufacturing facilities in Puerto Rico and Germany.
The majority of the 2,300 employees working on P&G’s pharmaceuticals business are also being transferred to Warner Chilcott in a merger that is expected to close by the end of this calendar year. The deal is pending necessary regulatory approvals, although a deal of this size will probably face very little if any reviews.
Warner Chilcott believes that this will transform the business into a global pharmaceutical company with an expanded presence in women’s healthcare and the urology market ahead of the planned launch of its own erectile dysfunction treatments. It will also add in gastroenterology therapies to the company’s prpduct list.
The sale price $3.1 billion will result in a one-time earnings increase for P&G of approximately $1.4 billion after-tax, or approximately $0.44 per share. P&G also sees dilution in the range of $0.10 to $0.12 off of earnings per share in fiscal year 2010 due to the lost earnings from the business and from stranded overhead costs.
P&G’s pharma business had revenues of approximately $2.3 billion and net income of approximately $540 million for the year ended June 30, 2009. Warner Chilcott will finance the deal with debt and has already received lending commitments for both senior secured debt facilities and a senior unsecured bridge facility. The lead financial advisors were J.P. Morgan and Morgan Stanley & Co. Incorporated. Warner Chilcott is advised by BofA Merrill Lynch, Credit Suisse, Barclays, and Citigroup; P&G’s financial advisor is Goldman Sachs.
Here is the more odd notion of all…. Warner Chilcott is up and up big. A 31% gain has shares up at $21.17 today, which appears to be a 52-week high. The market cap is now $5.3 billion for the stock. As of June 30. 2009, the company had only $138.19 million listed in cash and equivalents. Its total assets were listed as $2.616 billion, but of that there is $1.25 billion in goodwill and $885 million in intangible assets. After $854.9 million in long-term debt, the total liabilities are $1.155 billion. But then consider what this does for Warner Chilcott before considering how much debt is being absorbed….
The company generated $838.125 million in 2008 revenues. Gross operating income was $109.5 million, and it posted a net loss of $8.3 million after items. Analysts were expecting $1.01 billion for 2009 revenues and $1.07 billion for 2010 revenues. If you add in roughly $2.3 billion in revenues and add in even $500 million in earnings, this is a substantial boost. Suddenly this trades at less than two-times a blended revenue number and when you add in the expected earnings for this year on its own and with the P&G earnings it is under 10-times estimates. If we take the total shares and blend it with the stated figures and estimates, then the real number is closer to a P/E ratio of closer to 6….
Suddenly, Ireland has a new golden boy for its drug industry. As of June 30, Warner Chicott’s top listed holders were as follows:
- D.E. Shaw… 22,232,929 shares or 8.85%;
- Federated Investors… 6,870,611 shares or 2.73%;
- T. Rowe Price… 5,084,076 shares or 2.02%;
- Credit Suisse… 40,759,610 shares or 16.22;
- JPMorgan Chase… 38,538,692 shares or 15.34%;
- Bain Capital… 38,045,414 shares or 15.14%;
- Thomas H. Lee… 37,443,662 shares or 14.9%.
JON C. OGG
August 24, 2009
