Pharmaceutical giant Watson (NYSE:WPI) is getting ready to snap up the generic pharmaceuticals group Actavis for a reported €4.5 billion ($5.9 billion) in a deal that could be announced as early as tomorrow.  And while the deal will help Watson bolster its offerings and presence in the global generic pharmaceutical market, it will likely have the additional effect of dragging down Deutsche Bank’s (NYSE:DB) performance numbers for this quarter. The largest German bank has extended more credit to Actavis than what Watson values the company at. The result – Deutsche Bank could recognize a charge of as much as €400 million ($528 million) due to the deal.
We maintain a $49 price estimate for Deutsche Bank’s stock, which is about 12% above the current market price. The bank is slated to release its performance numbers for the quarter this Thursday.
In May 2007, Deutsche Bank was instrumental in getting Actavis delisted from the Icelandic stock exchange by arranging for the entire required capital as sole financier. But the loan had to be renegotiated when the valuation for the pharma group plunged after the economic crisis of 2008, forcing Deutsche Bank to recognize a charge.
Now, as Watson has its eyes set on Actavis, Deutsche Bank has a reason to be happy and sad at the same time.
The good news is that Watson will repay most of the capital Deutsche Bank extended to Actavis once the deal is finalized and announced. The bank can, hence, take the debt off its balance sheet once and for all. Definitely a better outcome for the bank which is shoring up its capital, than having the entire €3 billion ($3.9 billion) stuck indefinitely in Actavis.
The bad news, is the one-time charge that Deutsche Bank will have to take on its debt. Actavis’ lower valuation as a part of the deal is expected to result in a €300-€400 million ($390-$530 million) write-off for the bank. And this charge could be taken this quarter itself, rather than in Q2 2012.
Deutsche Bank reports its Actavis loan as a part of its ‘Corporate Investments’ division. The Watson-Actavis deal will result in a reduction in the outstanding assets for this division by nearly $4 billion.Notes: