Morning Commentary: Planned Teva Pharmaceutical deal looks ‘cheap’; existing Teva quiet

By Rebecca Melvin

New York, Nov. 30 – Teva Pharmaceutical Industries Ltd. launched a $3.375 billion mandatory convertible preferred offering early Monday for pricing on Thursday, and the deal looked pretty cheap, a Connecticut-based market source said.

The new Teva was seen at fair value at 103.7, using a 2 skew and credit spread of 200 basis points over Libor, the source said.

The mandatories were talked to yield 6.75% to 7.25% with a 17.5% to 22.5% initial conversion premium. The Israel-based drug company is also pricing about $3.375 billion of American Depositary Shares, for a total capital raise of about $6.75 billion.

Teva’s existing 0.25% convertible notes due 2026 were not trading very actively given that it is at about parity, sources said. According to Trace data, the Teva bond traded a little lower in tandem with lower shares at 148.75 to 149.75, compared to 150 previously. Teva shares were down $1.04, or 1.6%, at $62.43.

Proceeds of the Teva mandatories and ADSs are earmarked for acquisitions, including its $40.5 billion buyout of Allergan’s generic and international business, and for general corporate purposes. The Allergan deal is expected to close in the first quarter.

Despite its cheapness, Teva may not adjust the pricing but instead might upsize the deal, the Connecticut source suggested regarding the mandatory offering.

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