Fitch Affirms Actavis at 'BBB-' on Forest Labs Acquisition; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the ratings of Actavis plc (NYSE: ACT) and subsidiaries at 'BBB-' following the announcement that the firm will acquire Forest Laboratories, Inc. (NYSE: FRX) for approximately $25 billion. The Rating Outlook is Stable.

The rating action applies to approximately $6.3 billion of debt outstanding at Sept. 30, 2013. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

-- The combination of ACT and FRX is strategically compelling. The deal will result in a specialty business that is stronger competitively, particularly in the U.S., and that is expected to produce significant sales and cost synergies over the medium term.

-- Recent investment in the specialty pharmaceuticals segment should result in higher revenue growth and profitability for ACT versus the legacy generic pharmaceuticals business. However, the short time frame between recent acquisitions make it difficult to estimate run-rate EBITDA and cash flow of the company.

-- Fitch is also concerned that the proximity of the Forest Labs deal to ACT's purchase of Warner Chilcott plc (Warner Chilcott) could present significant integration challenges. These two businesses, which are heavily weighted toward the U.S., will comprise the bulk of the combined firm's specialty business and represent the two largest acquisitions in ACT's (and legacy Watson's) history.

-- The ratings are affirmed despite these concerns since the proposed funding strategy for the $25 billion transaction includes a significant equity component, and only about $4 billion of new long-term debt and $3 billion of assumed FRX debt will be added to the capital structure. Furthermore, ACT has a history of rapidly deleveraging following previous large acquisitions.

-- Fitch expects gross leverage of below 3x by year-end 2015 and thinks this target is achievable primarily on the basis of growth in EBITDA. The 'BBB-' rating incorporates ACT's high degree of financial flexibility. If EBITDA is below forecast due to inability to realize financial synergies, or slower than expected growth in the specialty pharmaceuticals portfolio, Fitch expects the company to pay down debt from adequate free cash flow (FCF) generation to achieve the 3.0x leverage target.

-- Fitch sees ACT's base generics pharmaceutical business benefiting from a moderately favorable operating environment for the global generic drug industry over the next several years, despite the slowing pace of branded-to-generic conversions post-2014/2015 and possible cost pressures from growing drug purchasers and generally constrained healthcare reimbursement globally.

--Gradually improving generic penetration rates in many developed European countries, the opportunity for continued expansion into developing markets, and the prospects of a burgeoning biosimilars market in the 2016 timeframe and beyond drive this view.

RATING SENSITIVITIES

Maintenance of 'BBB-' ratings will generally require ACT to operate with gross unadjusted debt leverage of around 3.0x or below, accompanied by consistent base business growth and meaningfully positive FCF. Successful integration of both Warner Chilcott and Forest Labs will also support the current 'BBB-' ratings.

Ratings flexibility will be limited in the near term. Maintenance of the 'BBB-' rating is based on Fitch's expectation that cash flows will be directed toward debt repayment as necessary to meet the 3.0x leverage target by the end of 2015. Setbacks in the integration of the Warner Chilcott and Forest Labs businesses or other cash payouts (i.e. litigation- or regulation-related) that hinder ACT's ability to meet the leverage target could pressure the 'BBB-' ratings.

A negative rating action could result from a further leveraging transaction during the de-leveraging and integration timeframe set above. Deteriorating operations or severely negative pricing trends leading to gross debt leverage that is expected to be sustained above 3.0x or FCF that is significantly reduced from current levels could drive a downgrade to 'BB+'.

A positive rating action is not expected in the near term, but could be precipitated by Fitch's expectation for gross debt leverage to be sustained below 2.5x, accompanied by consistent FCF margin of at least 6%. Additional de-leveraging and improved cash flows in the near-to-intermediate term could result from better-than-expected synergies from recent business combinations and/or new product launches.

Fitch has affirmed the ratings of ACT as follows:

Actavis, plc

--IDR at 'BBB-'.

Actavis Capital S.a r.l.

--IDR at 'BBB-'.

--Unsecured bank facility at 'BBB-'.

Actavis, Inc.

--IDR at 'BBB-';

--Unsecured notes at 'BBB-'.

WC LuxCo S.a r.l.

--IDR at 'BBB-';

--Unsecured bank facility at 'BBB-'.

Warner Chilcott Corporation

--IDR at 'BBB-'.

WC Company LLC

--IDR at 'BBB-';

--Unsecured bonds at 'BBB-'.

Warner Chilcott Finance LLC

--IDR at 'BBB-'.

The Rating Outlook for all IDRs is Stable.

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

Applicable Criteria and Related Research:

--'Fitch Assigns Initial 'BBB-' Ratings to Actavis plc & Subsidiaries; Outlook Stable' (Oct. 1, 2013);

--'Fitch Affirms Actavis' at 'BBB-'; Outlook Stable (Sept. 25, 2013);

--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (Aug. 5, 2013);

--'Global Pharmaceutical R&D Pipeline - Novel Drug Approvals Ease' (Sept. 23, 2013);

--'Trekking the Path to Biosimilars - Forging Ahead' (Aug. 5, 2013);

--'Fitch: Warner Chilcott Deal In Line with Actavis' 'BBB-' Ratings' (May 20, 2013);

--'Specialty Pharmaceuticals Snapshot - Key High Yield Consolidator Trends and Targets' (April 18, 2013)

--'Global Pharmaceuticals Sector and Companies Overview' (Jan. 29, 2013);

--'Pharmaceuticals Sector Credit Factor Compendium' (Nov. 13, 2012);

--'Rating Pharmaceutical Companies' (Aug. 9, 2012).

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=820917

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Jacob Bostwick, CPA
Associate Director
+1-312-368-3169
Fitch Ratings, Inc.
70 W Madison St.
Chicago, IL 60602
or
Secondary Analyst
Michael Zbinovec
Senior Director
+1-312-368-3164
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations:
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Jacob Bostwick, CPA
Associate Director
+1-312-368-3169
Fitch Ratings, Inc.
70 W Madison St.
Chicago, IL 60602
or
Secondary Analyst
Michael Zbinovec
Senior Director
+1-312-368-3164
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations:
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com