RBC comments. Myl
Mylan Inc.
MYL deal for ABT mature products could come this week; we offer our analysis
Our view: Per Reuters, talks may be in the late stages regarding a MYL purchase of ABT's developed markets portfolio. Our initial analysis points to attractive accretion on a MYL inversion which we think the market would like. However, there are several considerations that we look at in more detail along with sector implications – ABT to report 7/16 (Wed).
Key points:
(1) Our initial proforma analysis (exhibit 3) sees 2015E and 2016E accretion of 11% and 13% ($0.43 and $0.48) which we think would be viewed favorably. This assumes a $5 billion all stock transaction (satisfying inversion rules) bringing EBITDA of ~$500 million from ABT's developed markets (DM) portfolio. We assume deal proceeds over $5 billion could be debt financed with only limited impact to accretion.
(2) ABT's willingness to take MYL equity is key to a possible deal. This is important for two reasons (i) It's needed to satisfy inversion rules and our assumed lower tax rate is where the vast majority of our accretion is coming from (each 100 bps is ~$0.05 or 1%) (ii) We think there has been growing concern around MYL's ability to find a target willing and able to take proceeds in equity following a failed Meda bid.
(3) ABT's DM portfolio could offer attractive synergies but could also bring a growth headwind. Given EU overlap cost synergies could be significant (each $100 million is ~$0.17 or 4%). But we also believe the business is in modest decline. We see a ~1-2% revenue growth headwind through 2016E on a proforma basis to MYL standalone.
(4) An equity driven deal would de-lever MYL leaving it well positioned to pursue more deals immediately. This message could offset growth dilution concerns. Our proforma debt to EBITDA of 2.6x (below 3x target) could mean >$3 billion in additional financial flexibility post close with an advantaged tax platform from which to pursue deals from.
(5) This would take the focus away from the near-term earnings concerns we think are in the stock. MYL reports 2Q 8/7 with significant investor focus on where the guidance range will go given a sharp implied 2H ramp – our $3.30 and the Street's $3.39 are both below the midpoint of the $3.25 – $3.60 range. We think a deal announcement would help shift focus to 2015 and set a more favorable stage for the 9/18 analyst day.
What does this mean more broadly? We expect focus on more possible pharma spins to pick up. GSK, SNY, MRK and PFE all potentially have assets coming out at various points. We think strategic buyers who can leverage the cost and tax synergy opportunity will be well positioned and specifically would point to ACT (Top Pick) as a possible beneficiary where our confidence in the outlook remains high.
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