Pharma saga shows bad lending’s long half-life
By Quentin Webb
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Deutsche Bank’s unhappy Actavis saga shows just how long bad lending decisions can reverberate. Finally a $5.6 billion-plus cash takeover by generic drugmaker Watson Pharmaceuticals offers an exit.
Actavis’s 2007 buyout, by Icelandic tycoon Thor Bjorgolfsson, belongs to a different age. Bjorgolfsson was then reckoned among the world’s richest people and the Actavis deal was worth $6.4 billion including debt – five times the value of Iceland’s biggest listed company today. Deutsche employed bubble-era tactics too. The loans totalled a reported 4 billion euros, including 1 billion of “payment-in-kind” notes. These are particularly risky, since instead of paying interest in cash the PIK-note debt burden expands.
The deal backfired. The credit crunch made the debt unsellable and Actavis wobbled, operationally and financially. Merger and sale attempts flopped. A 2010 restructuring handed Deutsche significant control, including board seats and other rights, but no equity. The bank recorded 545 million euros of “charge-offs”, and shifted the debt into a “non-core” sin bin alongside a Vegas casino. Impairment charges of 457 million euros followed in 2011.
The new owner is not doing too badly, though. Actavis had actually built a major international business through dozens of acquisitions, despite sometimes skimping on integration. Watson’s $5.6 billion offer equates to 2.3 times 2011 sales and 13.8 times EBITDA. That is roughly in line with the mean 3.3 times historic sales and 14.7 times EBITDA for generics deals, Credit Suisse data show. Watson also targets $300 million of annual synergies – about 12 percent of Actavis sales – and should reap big tax savings from combining with a firm that recently moved to Switzerland.
With limited disclosure, it is hard to gauge exactly how Actavis’s owners and creditors have fared. It is not clear what smaller creditors were owed or received. Bjorgolfsson and minority shareholders – probably including kaput Icelandic banks – presumably received something for their consent. They could receive 250 million euros more in Watson shares, depending on future performance.
For its part, Deutsche books another 257 million euro impairment, suggesting the deal did not cover even its written-down debt. The total cost of this Viking misadventure? Five years of distraction and $1.7 billion in charges.