NEW YORK & CHICAGO–(Business Wire)– Abbott Laboratories’ (ABT) decision to sell its developed markets generic drug unit to Mylan Inc. (MYL) makes sense strategically for both companies, according to Fitch Ratings. The unit, which generated about $1.9 billion of revenues in 2013, is not core to ABT’s articulated business strategy, but it nearly doubles MYL’s presence in Europe while also offering synergy capture opportunities and allowing for tax inversion.
The sale will reduce ABT’s cash and EBITDA generation somewhat, possibly contributing to a modest leverage uptick. Fitch revised ABT’s Rating Outlook to Negative from Stable on May 20, following ABT’s announced agreement to acquire Latin American drug company CFR Pharmaceuticals (CFRP). While Fitch forecasts the acquisition of CFRP to increase ABT’s pro forma total debt leverage only modestly, the company is currently operating with leverage of 1.76x, higher than the 1.3x-1.5x range expected for this issuer’s ‘A+’ credit rating. With available cash and short-term investments of approximately $7 billion at March 31, 2014 and forecast 2014 FCF of $1.3 billion-$1.4 billion, the company may choose to build cash balances rather than pay down short-term debt.
ABT has a long history of divesting or spinning out non-core businesses, most recently exemplified with the spin out of AbbVie in 2013. In this transaction, ABT will divest the portion of its generic drug businesses that operate outside of faster-growing emerging markets. The retained emerging markets business, according to the ABT, accounted for almost $3 billion of revenues in 2013.Under the terms of the deal, ABT will obtain ownership of approximately 21% of the newly combined entity, while existing MYL shareholders will own approximately 79%
MYL management has said that the ABT deal is first in a series of transactions. We believe the all-stock nature of today’s deal will provide additional flexibility to consummate near- to intermediate-term debt-funded merger & acquisition (M&A). Fitch expects MYL will likely focus on the acquisition of specialty drug businesses, including injectables, to leverage its enhanced presence in Europe and its recently acquired Agila platform. Mylan will also benefit from a lower tax rate, as the transaction allows for a re-domicile to the Netherlands. MYL will join its three largest peers in being domiciled outside the U.S. (Sandoz is a division of Switzerland’s Novartis; Teva is based in Israel; and Actavis re-domiciled in Ireland with the 2013 acquisition of Warner Chilcott.)
U.S. corporations are giving more consideration to international M&A activity and change of domicile as a means to tap cash held overseas in a more tax-efficient manner. Last month, Medtronic Inc. announced it was purchasing Covidien plc for $42.9 billion. While Covidien is based in Massachusetts, it has been incorporated in Ireland since 2009. Other recent inversion activity has included Pfizer’s failed bid for AstraZeneca, AbbVie’s offer to acquire Shire, Endo’s merger with Paladin (2014), Perrigo’s purchase of Elan (2013) and the aforementioned acquisition of Warner Chilcott by Actavis (2013).
Additional information is available on www.fitchratings.com.
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