Actavis: Analysts See Upside Seen After Allergan Deal

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This week Actavis plc (NYSE:ACT) and Allergan, Inc. (NYSE:AGN) officially announced their merger deal, and analysts are starting to weigh in. The $219 per share acquisition deal Actavis made for Allergan was too rich for Valeant Pharmaceuticals Intl Inc (NYSE:VRX) (TSE:VRX)’s blood, so the company has declared that it is ending its hostile pursuit of Allergan.

Buy ratings on Allergan, Actavis reiterated

In their report dated Nov. 17, 2014, Deutsche Bank analysts Gregg Gilbert and Greg Fraser said they see “significant upside” for both Actavis plc (NYSE:ACT) and Allergan, Inc. (NYSE:AGN) based on the deal. It’s worth about $67 billion in cash and stock and is expected to close in the second quarter of 2015, assuming that it gets the approval of shareholders and regulators.

They believe the combination of the two drug makers makes a “‘best-in-breed’ company with strong generic and branded franchises, geographic diversity, and very solid management.” They reiterated their Buy ratings on both companies, along with their price targets of $277 per share for Actavis plc (NYSE:ACT) and $217 per share for Allergan, Inc. (NYSE:AGN). Those price targets are based on each drug maker’s standalone prospects.

Their updated analysis suggests that there will be meaningful earnings per share and discounted cash flow accretion. Their discounted cash flow valuation for Actavis is now $327, an increase of 32% compared to their standalone target. As for Allergan, they think shares could be trading at around $287 when the deal closes, delivering a total consideration to the Botox maker’s shareholders of about $235 per share.

What happened after the announcement?

In their report also dated Nov. 17, 2014, Bernstein analysts Aaron Gal, Erica Kazlow and Wimal Kapadia noted that Actavis plc (NYSE:ACT) shares reacted negatively right after the announcement about the deal. They wondered why that happened and reported a number of issues investors raised.

For example, investors expressed concerns that’s Allergan value captured most of the synergies. The Bernstein team also expected that the sideways trading was due to “risk-arb organization repositioning.” Additionally, they believe investors were a bit confused about the use of convertible bonds. They also believe that there were questions about the combined company’s long term growth trend, doubts about the projected revenue synergies and concerns about whether Actavis was growing on its own.

Of course it looks like investors are over these concerns, as Actavis shares have performed very strongly during regular trading today. Looking at the projections, the Bernstein analysts believe that the implied value of the stock is $330 per share.

Actavis could hit $300 or $400 a share

In their report dated Nov. 17, 2014, Sterne Agee analysts Shibani Malhotra and Austin Nelson said they think the accretion targets are “totally achievable.” They think that when the dust settles, Actavis plc (NYSE:ACT) stock could hit $300 or even $400 per share.

They note that since the deal is friendly, unlike the hostile bid from Valeant Pharmaceuticals, integration should be seamless. They also see Actavis plc (NYSE:ACT) as being well positioned to speed up the combined entity because CEO Brent Saunders has the experience necessary to drive long term value.

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