Could Warner Chilcott Plc (WCRX) Receive a Higher Bid?

Recently, Actavis Inc (NYSE:ACT) announced that it would acquire Warner Chilcott Plc (NASDAQ:WCRX) for around $8.5 billion in total consideration. Since the beginning of the year, Warner Chilcott has risen from around $12 per share to nearly $20 per share. Is a $5 billion deal a fair offering price for Warner Chilcott Plc (NASDAQ:WCRX)? Let’s find out.

Actavis and Warner Chilcott’s snapshot

Actavis Inc (NYSE:ACT) provides 250 generic pharmaceutical product families and more than 40 brand pharmaceutical products in more than 60 countries around the world, operating in three main business segments: Actavis Pharma, Actavis Inc (NYSE:ACT) Specialty Brands and Anda Distribution. Most of its revenue, $4.45 billion, was generated from the Actavis Pharma segment. The Anda Distribution segment contributed $986.4 million in sales and the Actavis Specialy Brands generated more than $482 million in revenue.

Among the three, the Actavis Inc (NYSE:ACT) Pharma segment has the highest margin at 33.3%, with the highest operating income of $1.48 billion, while the Anda Distribution segment had the lowest margin at 5.1%, with $50 million in profits. Actavis concentrates its sales into two biggest customers, Walgreen Company (NYSE:WAG) and McKesson Corporation (NYSE:MCK), accounting for 16% and 14%, respectively, of the total net sales.

Warner Chilcott Plc (NASDAQ:WCRX) is the U.S. leader in women’s healthcare, gastroenterology and dermatology, with six main product classes. The majority of its revenue, $793 million, or 31% of the total revenue, was derived from the sale of gastroenterology’s products. Osteoporosis products ranked second with $591 million in sales, or 23% of the total revenue, while the Hormonal Contraceptives products generated $544 million in sales. The company also has quite a concentrated customer base. Its three biggest customers are McKesson Corporation (NYSE:MCK) (27% of the total revenue), Cardinal Health (26%) and AmerisourceBergen (12%).

A good merger for Actavis

The merger would be a good move for Actavis Inc (NYSE:ACT) Specialty Brands to expand its footprint in gastroenterology and dermatology market, with $3 billion in annual revenue in Actavis Specialty Brands. Actavis estimated over $400 million in anticipated after-tax operational synergies, cost cutting and tax savings, which would be realized in 2014. The combined company would generate strong operating cash flow with only less than 3 times debt/adjusted EBITDA right after deal close. Along with a combined entity’s tax rate of around 17%, it thought the deal would generate more than 30% accretive to the 2014 non-GAAP EPS.

At around $20 per share, Warner Chilcott is worth $5 billion on the market. The market values Warner Chilcott Plc (NASDAQ:WCRX) at only 6.12 times EV/EBITDA. In contrast, Actavis Inc (NYSE:ACT) has a much higher valuation. It is trading at around $127.20 per share, with a total market cap of about 16.25 billion on the market. It is valued at as high as 15.3 times EV/EBITDA.