Perrigo Company (PRGO), Elan Corporation, plc (ADR) (ELN): This Merger Adds Value Multiple Ways

Perrigo is a leader in private label OTC and plans to launch around 60 more products in 2013. The street expects Perrigo’s EPS to grow 11% in 2013 and 16% in 2014. This is excluding the positive tax impact on company’s EPS from the Elan Corporation, plc (ADR) (NYSE:ELN) acquisition.

OTC Growth

The U.S OTC industry has shown rapid growth in the last few years. The analysts are expecting the industry to grow to approximately $32 billion by the end of 2014. Perrigo is currently the leading private label manufacturer in the industry and is set to benefit from this growth in OTC. The company expects to target a $10 billion opportunity in OTC markets in the coming years.

The growing opportunity in this space has also attracted other key players. The Procter & Gamble Company (NYSE:PG) and Teva Pharmaceuticals have partnered to target the OTC industry. P&G is already a leader in FMCG and Teva is a leader in generic pharmaceuticals. This partnership is a threat to existing industry players and would positively affect the valuations of P&G. The company expects this new OTC JV, PGT Healthcare, to generate sales of $4 billion by the end of this decade. Although the exact share of each partner is not public, Teva has reported $257 million in revenues from 2Q2013. Assuming both players have an equal share would put The Procter & Gamble Company (NYSE:PG) annual share around $1 billion.

Buy or Sell

The market has reacted negatively to the acquisitions of Elan with shares sliding down almost 9% on announcement. One of the major reasons behind this decline is the inability of the market to understand the unique synergy between the two companies. This acquisition would significantly reduce Perrigo’s tax payments and give it a $0.85 per share advantage. The new tax benefit increases the target price to $166 and supports the buy thesis for Perrigo.

Mohsin Saeed has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble.

The article This Merger Adds Value Multiple Ways originally appeared on Fool.com and is written by Mohsin Saeed.

Mohsin is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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