Allegan-based generic drug manufacturer Perrigo Co. (NYSE: PRGO) announced this morning that it agreed to acquire Irish pharmaceutical maker Elan Corp. PLC (NYSE: ELN) in a cash-and-stock transaction valued at $8.6 billion.
The transaction would allow Perrigo to lower its tax rate by domiciling itself in Ireland and transform the drugmaker into a global industry leader in terms of revenues, EBITDA and profit growth, according to news release issued this morning. Perrigo's effective tax rate would decrease from 30 percent to the mid-teens, enabling the combined company to "more efficiently manage its global cash and treasury operations," the statement said. The companies will host a conference call this morning, and copy of the release and conference call slides can be found on Perrigo's IR site.
Net of Elan's $1.9 billion in cash on hand, the transaction is valued at $6.7 billion. Perrigo shareholders would own 71 percent of the combined entity after the close of the transaction. The deal, which is subject to approvals, is expected to close by the end of 2013.
In announcing the transaction, Perrigo said the deal would continue to diversify Perrigo's global business and allow for further international expansion.
"We believe the combination of Perrigo and Elan will create an industry-leading global health care company with the balance sheet liquidity and operational structure to accelerate our growth and capitalize on international market opportunities," Perrigo Chairman and CEO Joseph Papa said in a statement.
Perrigo said in a statement that it "believes the combination to be financially compelling." The deal is expected to be immediately accretive to Perrigo's adjusted earnings per share in 2014. Combining the companies is also expected to result in more than $150 million of recurring after-tax annual operating expense and tax savings based on the elimination of redundancies and optimizing back-office support and R&D functions.
Elan's large amount of cash on its balance sheet plus the company's royalties on Tysabri, a multiple sclerosis (MS) drug, were attractive to Perrigo. Tysabri has been growing at a 19 percent compound annual growth rate from 2008 through 2012. Elan currently earns a 12 percent royalty on Tysabri, but that royalty increases on May 1, 2014 to 18 percent of net sales up to $2 billion and 25 percent of net sales above that amount. The deal has further upside if Tysabri is approved for more advanced forms of MS.
"The Tysabri cash flows are highly sustainable with multiple barriers to entry, analogous to the fundamentals of Perrigo's core business," Perrigo stated in a release.
In the transaction, Perrigo would create a new entity based in Ireland called New Perrigo that would acquire shares of both companies. Elan shareholders would receive $6.25 in cash plus 0.07636 shares of New Perrigo for each of Elan shares, which were valued at $16.50, a 10.5 percent premium. Perrigo shareholders will receive one share of New Perrigo for each share of Perrigo that they own upon closing and US$0.01 per share in cash.
New Perrigo expects its shares will be traded on the New York Stock Exchange and the Tel Aviv Stock Exchange.
Perrigo secured $4.35 billion in bridge financing from Barclays and HSBC Bank USA N.A., which, in addition to Perrigo's cash on hand (almost $301 million as of its March 30 filing) to finance the cash portion of the transaction – as well as to refinance Perrigo's existing debt. Perrigo plans to refinance and repay the bridge borrowings through new debt issuances and the use of Elan cash on hand.
Earlier this year, Elan rejected an $8 billion offer from Royalty Pharma after a four-month courtship and started an auction process to seek a buyer, according to a report in Bloomberg.