Teva plans to use cash, bonds to acquire Cephalon for $6.8 billion

By Jennifer Lanning Drey

Savannah, Ga., May 2 - Teva Pharmaceutical Industries Ltd. plans to use cash on hand, its bank lines and the public bond market to fund its acquisition of Cephalon, Inc. in a transaction valued at $6.8 billion, Eyal Desheh, Teva's chief financial officer, said Monday during a conference call held to discuss the proposed transaction.

Teva's and Cephalon's boards of directors have unanimously approved a definitive agreement under which Teva will acquire all of the outstanding shares of Cephalon for $81.50 per share in cash. The total enterprise value of $6.8 billion includes the conversion of Cephalon's convertible debentures and cash on hand and marketable securities, he said.

Teva plans to align the exact financing details with future cash flow, leaving the company with ample financial flexibility moving forward, Desheh said.

The company expects to repay the debt quickly based on the expected cash flow of the combined company, he said.

"We expect to begin to pay down our debt, as we always do, shortly following closing, and our financial leverage is expected to drop quickly," Desheh said.

After closing the transaction, Teva expects to maintain more than $1 billion of cash, he said.

Desheh declined to comment on exactly how much debt Teva will likely take on to finance the transaction, but he said, "With this current and very favorable debt market, we'll probably spread the tranches over a period to be paid down very, very quickly by cash flow to some longer-term [tranches], taking advantage of those low interest rates that are out there."

The combined company is expected to have a debt-to-EBITDA ratio of about 2 times, compared with a current ratio of 1.28 times for Teva. Financial leverage for the combined company is expected to be 34%, versus Teva's current financial leverage of 24%.

Post-closing debt is estimated at $12.7 billion, according to the slides accompanying the conference call.

Teva expects to return to its current leverage ratios within one-and-a-half to two years, Desheh said.

"It will not take a long time before we free up more resources for any potential or possible other financial moves," he said.

Expands branded business

Teva's decision to buy Cephalon supports a key element of the company's previously announced long-term strategic plan, which includes expanding its branded business into a diverse, specialty pharma business with a portfolio of products in key niche therapeutic areas, Shlomo Yanai, Teva's chief executive officer, said during the call.

The transaction supports Teva's stated goal of growing branded revenues from $4.6 billion in 2010 to more than $9 billion in 2015, Desheh later noted.

Immediately upon closing, the branded business portfolio will have about $7 billion of sales and a pipeline of more than 30 products in late-stage development, he said.

"By combining Cephalon's strong, marketed portfolio and pipeline of branded products with Teva's, we will diversify and expand our offerings in a way that accelerates and secures the future of our blended business," Yanai said.

Cephalon and Teva have complementary product lines, and by combining portfolios, Teva will strengthen and expand its position in central nervous system and respiratory products, the CEO said. At the same time, the combination will add Cephalon's pain management and oncology businesses, which are areas where Teva currently has no established commercial franchise.

The combined company is expected to generate at least $500 million of annual cost synergies within three years.

Strategic review culmination

Kevin Buchi, CEO of Cephalon, also said he believes the transaction will provide strategic benefits for both companies.

The agreement is the result of a rigorous process carried out by Cephalon's board of directors and management to consider a wide range of strategic options, Buchi said.

"By joining forces with Teva, we will benefit from their scale, worldwide reach and operational excellence," he said.

The transaction is expected to close in the third quarter.

Cephalon is a Frazer, Pa.-based biopharmaceutical company.

Teva makes generic and human pharmaceuticals as well as active pharmaceutical ingredients. The company is based in Petach Tikva, Israel.

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