In all likelihood, such a merger would involve a cash-for-stock purchase or tender offer. As the acquiring firm, Valeant would need to use a combination of leverage and cash to finance the deal. This could prove problematic. Since Valeant is highly leveraged at the moment, it might find it difficult to put together the financing necessary to set the transaction in motion. Indeed, the company is obviously looking for the best possible deal. During the first week of May, Valeant Pharmaceuticals Intl Inc (NYSE:VRX)’s management team quashed the early exuberance that surrounded the deal by announcing that the talks had hit a serious price-related speed bump. Neither company has indicated if he talks might restart. Likewise, no timetable for completion has been set.
How the Combined Company Might Look
As noted, the combined company would boast revenue of nearly $10 billion a year and enjoy a major foothold in the booming dermatology products market. Indeed, it would hold the rights to several key brand-name drugs like AndroGel and AndroDerm as well as the formulas for many popular generic compounds. This would be exciting for investors who believe in the potential for further expansion in the dermatological sub-field. On the other hand, the combined company would be heavily indebted and might still be recovering from a slew of earlier acquisitions. Despite raising full-year profit guidance figures, both Valeant and Actavis have recently reported acquisition-related charges.
Long-Term Outlook and Possible Plays
In sum, the dermatology sub-field has exhibited solid growth on the strength of popular acne treatments and topical hormone therapy creams. Valeant Pharmaceuticals Intl Inc (NYSE:VRX) and Actavis Inc (NYSE:ACT) have both profited from this growth. While the two companies engage in other activities, their core strengths lie here. If they ultimately merge, the combined firm could be a powerful force in this space; however, this deal is by no means assured. Investors who remain skeptical of the deal’s timely completion would do well to remain on the sidelines for the time being. Alternatively, well-researched long positions in Actavis may pay off handsomely in the event that the merger does go through as planned. In either case, these two companies bear watching.
The article Following Up an Acquisition With an Even Larger Merger? originally appeared on Fool.com and is written by Mike Thiessen.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.