Fitch puts Watson on rating watch Negative on planned acquisition of Actavis

US generics drugmaker Watson Pharmaceuticals (NYSE: WPI) has seen its rating downgraded by Fitch Ratings, including the 'BBB' Issuer Default Rating (IDR), on Rating Watch Negative as a result of its proposed acquisition of generics rival the privately held Actavis (The Pharma Letter April 26). The ratings apply to approximately $1.1 billion in debt outstanding as of Dec. 31, 2011.

Watson announced that it plans to acquire Actavis for an upfront payment of 4.25 billion euros (around $5.65 billion) plus additional consideration, contingent upon Actavis achieving negotiated levels of certain 2012 performance targets. The contingent payment, if fully earned, would result in the delivery of up to 5.5 million shares of Watson common stock in 2013. The company expects to complete the transaction by the fourth quarter of 2012. Fitch expects that debt funding of the acquisition will drive total-debt-to-EBITDA to above a level consistent with the 'BBB' IDR.

Fitch anticipates that Watson will finance almost 100% of the cost of the acquisition with debt. This will increase the total debt level to about $6.8 billion from $1.1 billion. Pro forma gross debt leverage is therefore anticipated to rise to 4.0 times (x) at the end of 2012 from 0.9x at Dec. 31, 2011.