Fitch: Warner Chilcott Deal In Line with Actavis' 'BBB-' Ratings

CHICAGO--()--The proposed $8.5 billion all-stock merger between Warner Chilcott plc and Actavis, Inc. is in line with Actavis' current 'BBB-' ratings, according to Fitch Ratings. A complete list of Actavis' ratings follows at the end of this release.

Fitch views the deal as initially neutral to slightly positive to Actavis' credit profile, with the potential for future enhancement as synergies are realized and cash flows continue to be directed toward debt repayment. Significant synergies related to an improved tax structure, lower interest rates, and certain manufacturing and other operational efficiencies are expected to be realized, particularly during 2014. Fitch thinks the company's stated $400 million of synergies is at the low end of what could be achieved in the first couple of years post-transaction. Furthermore, Actavis' already-announced plan for debt repayment is expected to be sustained.

Fitch notes that declining revenues and EBITDA expected from the legacy Warner Chilcott business in 2014-2015 may offset synergies from the deal and/or Actavis' debt repayment plan somewhat. The legacy Warner Chilcott business is also relatively concentrated, with 80% of 2012 revenues coming from North America and approximately two-thirds of overall sales generated by the company's top three products. Each of those three products is set to lose patent exclusivity in 2014.

Despite the pressure of Warner Chilcott's patent expiration profile, Fitch views the deal as strategically sound. Warner Chilcott's product portfolio complements the focus markets of Actavis' branded products business - women's health and urology. Warner Chilcott also has products in dermatology and gastroenterology, which will expand Actavis' current product offering. Rationale for the merger is supported generally by the generic drug industry's attention to offsetting the effects of the 'reverse patent cliff' in 2015-2016 by bolstering presence in certain branded product areas. In so doing, generic drug firms seek to improve and stabilize core revenue growth and better profit margins.

Of Warner Chilcott's currently outstanding debt, Fitch expects Actavis to in some way replace the $2.4 billion term loan with debt at interest rates and with terms more in-line with Actavis' 'BBB-' credit profile. Fitch also expects Actavis will explore its option to call the $1.25 billion Warner Chilcott unsecured bonds in September 2014 at approximately 104%, per the bond indenture. Fitch notes that Actavis has $450 million of senior unsecured notes due in August 2014 as well.

Fitch continues to believe Actavis is committed to maintaining an investment grade credit profile. Debt-to-EBITDA of around 3.0x with consistent base business growth and robust cash flows will be required to support the current 'BBB-' ratings. Fitch forecasts debt leverage of 2.8x-3.0x at Dec. 31, 2013, pro forma for the Warner Chilcott deal. The combined company will generate in excess of $3 billion in EBITDA and $1.6 billion of free cash flow in 2014 on a pro forma basis.

Fitch currently rates Actavis, Inc. as follows:

--Long-term Issuer Default Rating 'BBB-';

--Senior unsecured bank credit facility 'BBB-';

--Senior unsecured notes 'BBB-'.

The Rating Outlook is Stable. The ratings apply to approximately $6.5 billion of debt at March 31, 2012.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (August 2012);

--'Rating Pharmaceutical Companies - Sector Credit Factors' (August 2012);

--'Fitch: Strategic Actavis/Warner Combo Could Pressure Credit' (May 2013);

--'Fitch Downgrades Watson's IDR to 'BBB-'; Rates New Debt Issuance 'BBB-' (September 2012).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Rating Pharmaceutical Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684459

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Contacts

Fitch Ratings
Jacob Bostwick, CPA
Associate Director
+1-312-368-3169
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Michael Zbinovec
Senior Director
+1-312-368-3164
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
Email: brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Jacob Bostwick, CPA
Associate Director
+1-312-368-3169
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Michael Zbinovec
Senior Director
+1-312-368-3164
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
Email: brian.bertsch@fitchratings.com