TIME Viagra

Valeant Snaps Up ‘Female Viagra’ Maker Sprout for $1 Billion

A trademark piece of fast dealing from the acquisition-driven Canadian company

The ink is hardly dry on the approval letter from the Food and Drug Administration, but the makers of Addyi, the “Female Viagra,” have decided it’s time to cash out.

Canadian-based Valeant Pharmaceuticals said Thursday it’s agreed to buy Sprout Pharmaceuticals Inc. for an initial $1 billion in cash, generating an immediate and hefty pay-day for the pint-sized Raleigh, NC-based firm. The bill may rise as Addyi passes certain (unspecified) milestones in sales and profits

It’s only two days since the FDA gave Addyi its blessing, making it the first officially sanctioned treatment for boosting female sexual desire in the U.S.. Valeant is betting that the drug will be the same kind of runaway success as Viagra, Pfizer Inc’s pioneering treatment for male erectile dysfunction, 15 years ago.

Valeant is due to pay $500 million upon closing the transaction (expected by the end of September) and another $500 million in the first quarter of 2016. It expects Addyi to go on sale in the U.S. in the fourth quarter, and to add moderately to Valeant’s earnings in 2016, according to the company’s statement.

Sprout will remain headquartered in Raleigh as a division of Valeant, a group that habitually prefers to buy drugs developed by others rather than develop them itself.

A person familiar with the situation told Fortune that “Valeant and Sprout had been in talks for about three to four weeks and had structured the deal so that the terms could be finalized quickly after Addyi’s approval.”

“Delivering a first-ever treatment for a commonly reported form of female sexual dysfunction gives us the perfect opportunity to establish a new portfolio of important medications that uniquely impact women,” Valeant chairman and CEO Michael Pearson said in the statement.

Sprout CEO Cindy Whitehead commented that Valeant’s international reach “offers us a global footprint that could eventually bring Addyi to women across the globe.”

UPDATE: This article has been updated to include information about talks between the two companies prior to Thursday.

TIME pharma deals

Ireland’s Horizon Pharma Launches Hostile, $3 billion Bid For U.S. Rival

FRANCE-INDUSTRY-PHARMACEUTICAL-HEALTH-COSMETIC
JEAN-CHRISTOPHE VERHAEGEN—AFP/Getty Images

Offer represents a 42% premium over Depomed's Monday closing price

Ireland’s Horizon Pharma is bringing its $3 billion takeover offer for U.S. rival Depomed directly to the company’s shareholders after being rebuffed in its attempts to negotiate with Depomed’s management.

Horizon’s hostile bid for Depomed, announced on Tuesday, values the Newark, Calif.-based specialty pharmaceutical company at $29.25 per share, which represents a 42% premium over Depomed’s Monday closing price. Depomed’s share price jumped nearly 40% on the news of Horizon’s offer.

The Irish manufacturer of drugs to treat arthritis and other inflammatory diseases said in a press release that it made “repeated attempts” to enter into deal discussions with Depomed’s management and board starting in March, only to have those advances and its takeover offer rejected. Depomed makes a range of pain treatments and products that treat conditions related to the central nervous system. Horizon believes the deal would increase sales for both companies’ products while the five different drugs Depomed currently has on the market would nearly double the size of Horizon’s current portfolio.

“The strategic and financial benefits of our proposal are highly compelling,” Horizon CEO and chairman Timothy Walbert said in a statement. Walbert added that his company’s proposal offers “substantial long-term value for Depomed’s shareholders,” whom he encouraged to urge the Depomed board to enter deal discussions.

If the two companies are able to reach an agreement, it would represent the latest in a string of deals for Horizon, which paid $660 million for Vidara Therapeutics International last year and also acquired Hyperion Therapeutics for $1.1 billion earlier this year. The pharma industry in general has seen more than its share of dealmaking recently, with deal volume and value on the rise in the first quarter of 2015, led by mega-mergers such as AbbVie’s $21 billion purchase of Pharmacyclics and Pfizer’s $17 billion acquisition of Hospira.

TIME M&A

Willis Group to Merge With Towers Watson

Iconic Sears Tower Changes Name To Willis Tower
Scott Olson—Getty Images The Willis Tower sign.

Combined company will be worth $18 billion

Willis Group Holdings, an insurance broker and risk advisory firm, and professional services group Towers Watson, announced Tuesday they plan to merge.

The combined company, Willis Towers Watson, will be worth $18 billion, taking in about $8.2 billion in revenue, according to The Wall Street Journal.

The Ireland-based company is expected to achieve over $100 million in cost-savings on account of the merger. The Towers Watson Chairman and CEO, John Haley, will remain CEO, and Willis Group Holdings CEO Dominic Casserley will be president and deputy CEO.

“These are two companies with world-class brands and shared values. The rationale for the merger is powerful – at one stroke, the combination fast-tracks each company’s growth strategy and offers a truly compelling value proposition to our clients,” said Casserley in a press release.

“We will advise over 80% of the world’s top-1000 companies, as well as having a significant presence with mid-market and smaller employers around the world,” he added.

TIME M&A

Regulators Just Effectively Killed Another Big M&A Deal

A US. Foods truck is shown on delivery in in San Diego
Mike Blake — Reuters A US Foods truck is shown on delivery in San Diego, Calif.

Sysco will pay a $300 million break-up fee

A $3.5 billion merger between two of the largest foodservice distributors has been called off, a win for regulators that had sought to kill the deal.

Sysco on Monday said it would pay a $300 million break-up fee to walk away from its merger agreement with US Foods, a move that comes days after a U.S. District Court granted the federal government’s request for a preliminary injunction to block the proposed Sysco-US Foods merger. Sysco also needed to pay $12.5 million to Performance Food Group, which would have purchased some US Foods facilities as part of the deal.

“After reviewing our options, including whether to appeal the Court’s decision, we have concluded that it’s in the best interests of all our stakeholders to move on,” said Bill DeLaney, Sysco president and chief executive officer.

Regulator concerns were a top worry when Sysco first announced the deal in late 2013. The Federal Trade Commission ultimately filed a lawsuit earlier this year over concerns about the deal, which it said would have given the combined company 75% of the national market for distribution services. The FTC was worried that that would tilt the power too heavily in favor of the foodservice distribution service companies, hurting customers like restaurants, hospitals, hotels and schools, which could have faced higher prices.

When deals are killed by regulators, companies often try to ease the pain by announcing shareholder-friendly actions. That happened today, with Sysco announcing plans to spend an additional $3 billion to buy back shares over the next two years.

TIME M&A

These Two Supermarket Chains Just Entered a $29 Billion Marriage

Shoppers Inside A Delhaize Group SA Supermarket As Merger With Royal Ahold NV Looms
Bloomberg—Bloomberg via Getty Images Shopping carts sit in a trolley bay outside a Delhaize Group SA supermarket in Wezembeek, Belgium.

It will be one of the largest grocery corporations in the U.S.

Dutch grocery chain Royal Ahold and Belgian grocery chain Delhaize have agreed to a merger. Based on the companies’ stock prices from closing time Tuesday, the combined corporation would have a market capitalization of $29.1 billion.

The two European retailers confirmed merger talks back in May, but now it is official. And this merger is an effort to be stronger in the States, where competition has been stiff. Hans D’Haese, an analyst with Degroof, told The Wall Street Journal the deal is a “defensive move.”

Ahold and Delhaize may not be household names to all American shoppers, but both of them make more than half their revenues in the U.S. Ahold, based in the Netherlands, operates the Stop & Shop and Giant chains, and online grocery store Peapod, while Belgium’s Delhaize owns the Food Lion and Hannaford banners, the Journal said.

The new company will be one of the top five biggest food chains in the U.S.

Ahold is the larger company, with some $33 billion in annual revenue to Delhaize’s $21 billion, and so Ahold is the de facto lead in the deal. It gets first billing in the new name, Ahold Delhaize, and it is Ahold’s CEO, Dick Boer, who will stay on as CEO of the new corporation.

The new entity, Ahold-Delhaize, is reminiscent of other food mega-mergers in the last decade, such as Anheuser-Busch InBev, Kraft Heinz, or MillerCoors.

TIME Media

The Single Best Article You Will Ever Read About AOL

AOL Verizon Takeover Rumors
Justin Sullivan—Getty Images The AOL logo is posted on a sign in front of the AOL Inc. offices on February 7, 2011 in Palo Alto, California.

Dated February 7, 2000, it was written by a legend

Verizon Communications is buying America Online. In a deal valued at $4.4 billion, the telecom giant is acquiring the dial-up pioneer turned media hub turned ad-tech company. Verizon is framing the move as an expansion of the video and media offerings—AOL owns The Huffington Post, TechCrunch, and Engadget, among others—it can provide over its wireless networks.

But it is also the end of the long, often-tortured story of a New Economy darling. AOL, of course, was part of the $350 billion merger with Time Warner which signaled the top of the first dot-com bubble. (Choose your superlative: disaster, epic failure, worst merger in history…) Though much has been written about the deal, especially since its 15-year anniversary earlier this year, the best analysis is still a story written by Carol Loomis in Fortune. In a February 7, 2000 piece headlined “AOL+TWX=???,” Loomis took the deal joint-by-joint, and in so doing explained the phenomenon of AOL:

The question of whether there are going to be synergies of convergence—you will please pardon those discredited words—is, needless to say, huge, and very much a part of the murkiness that surrounds the payoff in this merger. The two companies, anticipating they’ll be joined before the end of this year, have told analysts to expect about $1 billion of incremental EBITDA in 2001. The “low-hanging fruit” in this corporate orchard, says one insider, is cuts that both companies can make in advertising and direct-mail costs as they begin to exploit one another’s marketing channels.

Read the full piece here and it’s follow-up from two years later, “AOL Time Warner’s New Math.”

The stories were brave because Fortune, like TIME, was then owned by Time Warner. But perhaps more importantly, they expose a culture of self-enrichment and self-aggrandizement that led to the very real wiping out of wealth for thousands of people. Both provide the essential preamble to the spin-off and rocky past few years AOL has weathered on the way to today’s announcement.

(Full disclosure: I worked at AOL in 2010-2011.)

TIME Telecom

Why Nokia’s Blockbuster Merger Turned Into Such a Mess

Nokia's chairman Risto Siilasmaa, Nokia's Chief Executive Rajeev Suri, telecommunications company Alcatel-Lucent's Chief Executive Officer Michel Combes and Alcatel-Lucent's chairman of the supervisory board Philippe Camus shake hands prior a press conference on April 15, 2015 in Paris.
Chesnot—Getty Images Nokia's chairman Risto Siilasmaa, Nokia's Chief Executive Rajeev Suri, telecommunications company Alcatel-Lucent's Chief Executive Officer Michel Combes and Alcatel-Lucent's chairman of the supervisory board Philippe Camus shake hands prior a press conference on April 15, 2015 in Paris.

Nokia marrying Alcatel-Lucent will have a huge impact

The big headlines in tech M&A come when they involve growth – Facebook buying Instagram or WhatsApp, for example – but more often they tie together two aging companies in established but still important industries. Ideally, in those cases, the merging partners will complement each other’s weaknesses, making for a stronger corporate marriage.

Take the mature but competitive telecom-equipment industry. If selling and maintaining the arcane gear that quietly keeps the Internet humming is hardly a sexy industry, it’s crucial if you want to watch a video of a dog trying to catch a taco in its mouth. Last week, when one industry giant (Nokia) offered to merge with another (Alcatel-Lucent) in a $16.6 billion deal, it seemed like a textbook tech M&A deal, one that analysts have been expecting for years.

Instead, the announcement of the deal seems to have left everyone unhappy. Analysts lined up to argue why the tie-up would be troubled, while investors wasted little time in selling off shares of both companies. Since the deal was announced Wednesday, Nokia’s shares have lost 4% of their value and Alacatel-Lucent’s have lost 21%.

This is the rare M&A deal that everyone has long-expected to happen and yet seems to please almost nobody. The telecom-equipment sector has been rife with consolidation and restructuring for years, as companies scramble to grab control of technologies that power broadband, wireless networks, networking software and cloud infrastructure.

Both Nokia and Alcatel-Lucent have been undergoing wrenching restructuring to compete with Sweden’s Ericsson, the market leader, and China’s up-and-comers Huawei and ZTE. Nokia sold its handset business to Microsoft for $7.2 billion in 2013, which helped return the company to profitability last year. Now that Nokia is alsoshopping around its mapping software, a merger seems like an important step toward strengthening its remaining operations in the telecom-equipment business.

Alcatel-Lucent has been having a harder time in the past decade. In 2006, the stock of France’s Alcatel was trading near $16 a share when it paid $13 billion for US-based Lucent. But clashing cultures, rigid bureaucracies and a failure to innovate led to years of losses at the combined firm, pulling Alacatel-Lucent’s stock down as low as $1 a share. Years of restructuring brought tens of thousands of job cuts but also, in recent quarters, signs the company may be making a fragile comeback.

So why did everyone expect a Nokia-Alcatel merger to work when the Alcatel-Lucent one failed? For one, there was a complementary fit in terms of the product and geographical markets both companies served. Also, both companies had just emerged from painful restructurings holding smaller shares of a competitive market. By combining, they could command a market share rivaling Ericsson’s and also marshall resources needed for the high R&D costs of next-generation gear.

That was the theory on paper, and for years reports surfaced periodically that the two were talking about joining forces. Talks of Nokia buying Alcatel’s wireless business fell through in 2013, and another report of a merger last December went nowhere. Now that it’s happening, the conversation has shifted from speculation about the deal to the details of how it would work. And some of the details aren’t pretty.

Any large-scale tech merger requires years of integration of sales, engineering and managerial ranks. In the best case, it takes years to complete. In the worst, it leads to entrenched fiefdoms and a bureaucratic hall of mirrors. And in areas where there is overlap, job losses will follow. But Alcatel-Lucent is partly owned by the government of France, which sees the company as a strategic national asset. It will fight massive post-merger layoffs in France, and the Finnish government is likely to do the same.

Analysts expect the trouble that all this work involves will hamper Nokia for some time. Some argued Nokia should have bought only Alcatel’s wireless assets, but since that didn’t didn’t work Nokia offered a discount for the whole company. And what a discount: Nokia’s bid is worth only 0.9 times Alcatel-Lucent’s revenue last year, well below the average figure of 2.5 times revenue for recent telecom deals. Alcatel-Lucent’s shareholders feel the discount is too much, leading to last week’s selloff.

So as inevitable as a combination of Nokia and Alcatel-Lucent seems, there are regulatory, integration and cultural issues that will complicate things for years. In the meantime, few investors are pleased about the deal. Throwing these companies together may be like, well, that taco heading toward the dog’s mouth: the appetite is there, but in the end all you have is a mess.

TIME technology

What Hewlett-Packard’s Split Really Means

Samsung, HP Pop-Tops Do Laptop Double Duty
David Paul Morris—Bloomberg/Getty Images The Hewlett-Packard Co. logo is displayed on the back of the Envy x2 displayed for a photograph in San Francisco, California, on, March 13, 2013.

Like its peers, HP has long said that software and services, not hardware, are the keys to future success. A split prepares the company to prove it

fortunelogo-blue
This post is in partnership with Fortune, which offers the latest business and finance news. Read the article below originally published at Fortune.com.

“Symbolism is important. I learned that in politics.”

That’s what Meg Whitman, chief executive of Hewlett-Packard, told Fortune‘s James Bandler in our May 21, 2012 cover story on the company and its woes. Back then, HP was in disarray. Léo Apotheker had taken the reins after Mark Hurd, now co-CEO of Oracle, had left the company in tatters. “Mice skittered in the corridors. Spiders fell from cracked ceilings,” Bandler wrote. “As the company cut back on trash pickups, detritus piled up, and in one location workers took garbage home in their cars.”

Apotheker, a former executive at the German software giant SAP, was supposed to be the answer, but his decision to acquire Autonomy, a British enterprise software company, for $10.3 billion was a flashpoint that sealed his fate. He would last less than a year in the top position. Whitman was appointed to replace him in September 2011. A month later, she told the New York Times the following: “First and foremost, H.P. is a hardware company. We want to build out our software, but I don’t think we are done yet on hardware.”

On Monday morning, almost three years to the day that she took HP’s top job, Whitman declared the “One HP” mission over. Hewlett-Packard will split into two companies: Hewlett-Packard Enterprise, which will specialize in enterprise technology infrastructure, software, and services; and HP Inc, which will focus on PCs and printers.

HP will remain a hardware company. Hewlett-Packard will not.

 

For the rest of the story, please go to Fortune.com.

TIME Fast Food

Outrage Over Burger King’s Merger Is Totally Misdirected

A sign stands outside a Burger King restaurant on Nov. 1, 2006 in San Francisco.
Justin Sullivan—Getty Images

The bottom line is it's a solid deal

Outrage is a useful tool in a democracy, but not when it’s directed at the wrong target or ignores the facts. As the criticism of Burger King’s so-called ‘tax inversion’ deal with Canadian fast-casual restaurant and coffee chain Tim Hortons heats up in the political arena, several facts are being blatantly ignored. While it may be ideologically satisfying to label the merger as being unpatriotic because it will deprive the U.S. Treasury of tax dollars, it is also an overblown criticism.

Consider how shareholders of public corporations get taxed. Unlike investors in private companies who get taxed once on their pass-through income, public investors get a double hit.

To take a simple example, for every dollar that a public company makes in income, it has to pay 35% in federal income taxes as well as more in state and local taxes – let’s call it another 5%. The remaining 60 cents are then distributed as dividends to shareholders. Of that 60 cents, the shareholders now have to pay personal taxes in the average range of 20% to 39.6% depending on how long they have held the stock. Again, taking state and local taxes into account, in aggregate then, most shareholders pay somewhere between 55% and 67% in taxes on their investment in a public company.

This analysis, of course, ignores tax loopholes that large public companies are able to take advantage of but such loopholes rarely yield more than a 5-10% benefit, which still leaves shareholders paying an average of 50% in taxes.

Even those who believe in progressive taxation would be hard pressed to agree with this tax scheme. True, shareholders may also achieve gains through the appreciation of their stock, which is not taxed twice, but that is meant to be a bonus to incentivize people to invest, not to be an offset against dividend income. The latter could make tax incentives for investing a zero-sum game, which makes no sense.

From a political standpoint, it may be beneficial to demand that American companies not repatriate abroad for tax reasons, but the merger of Burger King with Tim Hortons has a lot more to do with the tight margins in the burger joint business and the more robust margins in the fast-casual restaurant and coffee chain trades. As Burger King struggles with hyper competition from McDonalds, Chipotle, and Starbucks, it needs to explore expansionary opportunities. The fact that Tim Hortons happens to be in Canada – in this case, at least – is incidental.

Moreover, the likely tax savings for Burger King by a tax inversion would only be around $3.4 million this year, given that Canada’s total corporate tax rate is 26.5% and Burger King paid an actual tax rate of only 27.5% last year, which would not be a lot for a company with more than $1 billion in top-line revenues and $340 million in profits on a run-rate basis for 2014. To put it another way, If the management of Burger King agreed to an $11 billion merger simply because of $3.4 million of cost savings, it would be bad management indeed. However, that is not the case here and all signs, when rationally examined, point to the fact that this deal is important for Burger King’s future growth, which will also benefit its employees, shareholders, and customers.

Questioning mergers based on anti-competitive factors is fine, but questioning the wisdom of patently good corporate deals simply because there are ancillary tax benefits is silly. It distracts from larger issues like labor relations and the pressures of global competition on the American economy, while doing nothing to benefit the discussion about tax reform.

This particular example has no real meat, except perhaps in the press.

Sanjay Sanghoee is a political and business commentator. He has worked at investment banks Lazard Freres and Dresdner Kleinwort Wasserstein, as well as at hedge fund Ramius. Sanghoee sits on the Board of Davidson Media Group, a mid-market radio station operator. He has an MBA from Columbia Business School and is also the author of two thriller novels. Follow him @sanghoee.

TIME mergers

Tobacco Mergers Are Creating a More Efficient Killing Machine

Several brands of cigarettes are arranged for a photograph in Tiskilwa, Illinois, U.S., on April 17, 2012.
Bloomberg/Getty Images Several brands of cigarettes are arranged for a photograph in Tiskilwa, Illinois, U.S., on April 17, 2012.

It’s been a year of colossal mergers or proposed mergers among some consumer goods and services companies. Comcast wants to take over Time Warner Cable (not affiliated with TIME) to form the nation’s largest cable company. AT&T and DirectTV want to combine to compete against them. The market also expects T-Mobile and Sprint to hook up, further reducing competition in mobile phone service.

Now add to that the tobacco industry. Reynolds American announced a deal to acquire Lorillard Inc. which it values at $27.4 billion. It’s a combination of the second and third largest cigarette makers after Altria Group, which owns Philip Morris USA. As part of the deal, British American Tobacco Plc retains its 42% stake in Reynolds by providing $4.7 billion in funding.

That’s a lot of dealmaking for the Federal Trade Commission and the antitrust division of the Justice Department to bless or deny. The goal of antitrust statutes is to preserve competition in any industry segment. Trustbusters don’t care who provides that competition, just as long as enough of it exists. That’s the ongoing debate in the proposed cable combination. It’s axiomatic that when two dominant players mergers prices rise and consumers suffer.

The proposed tobacco merger has a similar competitive profile. Combining the second and third largest companies will certainly reduce competition, giving Reynolds a 34.1% market share after divestitures. Unlike the media mergers, though, this one takes place in a shrinking market, as smoking continues to decline. Consolidation in a declining market certainly makes sense from an economic point of view. And there’s a clever wrinkle in this deal, in that Reynolds will sell off the KOOL, Salem, Winston, Maverick and blu brands to Imperial Tobacco for $7.1 billion—the idea is to create a stronger No. 3 competitor to keep the antitrust forces at bay.

There’s one other big difference, though: the merger will allow these two companies to be more efficient in killing people with their products. In its merger document, Reynolds says the deal would produce $800 million in cost savings and produce double digit profit gains by the second year. Not that Reynolds is a laggard. The company had already doubled its operating profit margin to 36.7% since 2004. And its 10–year return to shareholders of 542.2% has dwarfed the S&P’s return. This is a profit machine, even if a lethal one. According to the American Cancer Society, about 224,210 new cases of lung cancer will be diagnosed this year and 159,260 people will die from lung cancer—that’s more than colon, breast, and prostate cancers combined, says the ACS.

The new company will feature brands including Camel, one of the top premium smokes, and Vuse, a fast growing e-cigarette, but the prize in deal for Reynolds is Lorillard’s Newport, now the No. 1 menthol brand. Newport now owns a 12.6% share of the entire cigarette market in the U.S. and it’s growing —33.7 billion menthol “sticks” were sold last year. According to the Reynolds’ presentation, Newport has an “attractive demographic profile.” That profile, says smokefree.gov, includes blacks, women, Hispanics and younger people, all of whom are higher-than-average consumers of menthol cigarettes. These very characteristics have put menthol under the regulatory spotlight, leading to speculation that the Food and Drug Administration might ban menthol. But Reynolds clearly doesn’t believe that the feds will make any such move. “While cigarettes are dangerous there is not a significant difference between a menthol cigarette and a non menthol cigarette,” noted Murray Kessler, Lorillard’s CEO. “And ultimately the science will prevail.”

The same science holds the view, which none of these companies disputes, that tobacco use is deadly. And smoking costs our health care system billions of dollars annually to treat smokers. Should the FTC or Justice factor public health considerations into the deal? For instance, if the FTC believes that cigarette prices will increase, would it still bless the deal because rising prices might help ration demand—force more smokers to quit. Conversely, would blocking the deal, and keeping the competitors in place, have the opposite effect and lower prices, thus attracting more smokers?

That’s not necessarily an analysis that antitrust regulators are willing to make. Typically the antitrust agencies look only at the competition effects. As a former FTC official told me: “The traditional view has been that if the health and safety regulators wish to impose conditions, that’s their call entirely.” Expect the FTC to stick to the economics, which will be great for the tobacco companies, and their investors. The customers are on their own.

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