Watson may refinance convertibles to help fund Arrow acquisition

By Jennifer Lanning Drey

Portland, Ore., June 17 - Watson Pharmaceuticals Inc. is evaluating options for long-term debt financing that could include a refinancing of its existing $575 million of convertible debentures, Mark W. Durand, chief financial officer of Watson, said during a company conference call held Wednesday.

The financing would be used to fund a portion of Watson's proposed $1.75 billion acquisition of privately held Arrow Group.

The company said it has the ability to fund the $1.05 billion cash portion of the transaction using cash and additional borrowings.

Upon closing, Watson estimates its pro forma debt to EBITDA ratio will be less than 2.5 times, and debt to capitalization will be less than 40%, Durand said.

The final amount of debt that Watson takes on to finance the transaction will depend on the company's operational cash position at the time of closing, but Durand suggested a general estimate of about $500 million.

The potential successes of significant product launches within the next three years are expected to generate substantial free cash flow, which will allow Watson to rapidly improve the balance sheet, he said.

"We believe we have a prudent financing plan in place," Durand said.

Consideration also includes the issuance of about 16.9 million shares of Watson common stock valued at $500 million.

The remaining $200 million will be paid in the form of zero-coupon preferred stock redeemable three years after the closing of the transaction.

The transaction is expected to close in the second half of the year and be accretive to cash earnings in 2010.

More room for growth

Durand also said during the call that the proposed transaction does not hinder Watson's ability to continue to grow its brand-name business by acquiring late-stage development products as it has been doing for the last two years.

"We have the financial capacity and wherewithal to do that, and we will continue to do that as opportunities present themselves," he said.

The CFO also said that while Watson does not expect to do another major acquisition in the near future, the company is not frozen from looking at additional opportunities to grow its brand business and generic footprint on a selective basis.

"One of the major attractions of this transaction was the compelling growth profile that allows us to have the financial capability to, in a very short time, be once again out looking for ways to grow our business," he said.

Cost synergies, which Durand noted were not the driving factor behind the transaction, are expected to be in the range of $25 million to $35 million in the first 18 months. Watson expects there will be additional cost savings that have not yet been quantified.

Arrow is a private generic pharmaceutical company with commercial operations in more than 20 countries.

Corona, Calif.-based Watson is a developer and distributors of pharmaceuticals with a portfolio that includes generic products and branded pharmaceuticals.

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