Mylan’s Shareholders Act As LBO Lenders

Mylan Labs (MYL-NYSE) is seeing its shares take a beating because it is acquiring Merck KGaA’s generic unit and Mylan is the acquirer in what is a very leveraged buyout.  It isn’t just the fact that there will be dilution, it’s the fact that the leverage today and tomorrow is going to be a large burden for years ahead.  This also just took away almost any shot that Mylan Labs could ever be considered a potential takeover target itself.

The company is taking 2 steps back to jump 6 steps forward and the 6 steps forward won’t come for several years.  This merger is supposed to be dilutive to earnings in year one, earnings neutral the following year and won’t be accretive to earnings until year three.  The value of the acquisition is a massive sum of $6.6 Billion in cash.

Mylan has a market cap of $4.4 Billion and its Q4 sales data is still outstanding with results due in 10 days.  Wall Street estimates put the current salesat roughly $1.6 Billion, so its price/sales ratio is about 2.75 after today’s 10% stock drop.  Merck KGaA’s generic unit had $2.4 Billion in its last fiscal sales, so based on a $6.6 Billion price tag this also gives the Merck KGaA a 2.75-times sales value.  Mylan isn’t overpaying on any ratios per se, except that it will be leveraging its balance sheet drastically because it will need to have more share sales and will need to issue more debt to cough up $6.6 Billion.

Teva Pharmaceuticals (TEVA-NASDAQ) trades at roughly 3.6-times sales with its approximate $30 Billion market cap and was deemed a competing bidder for the unit, and it essentially said the deal at the Mylan price didn’t make financial sense for it to pursue. 

Mylan is at least skipping the private equity cycle and offering existing and new shareholders the long-term leverage and upside.  If you owned Mylan prior to today, you see that the cost for this is at least a 10% haircut off the top.  Private equity firms are looking for more than 10% gains over the long-haul, so hopefully the Mylan equity holders pre-LBO are understanding and can see the long-term picture.

Jon C. Ogg
May 14, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.