Is TEVA Next?

Is TEVA Next? The Significance Of Its 136-Acre Golf Course Given VRX's CEO's False Comments About A Non-Existent AGN Golf Course

Summary

• VRX intends to acquire AGN for ~$50B.
• As reported by WSJ, VRX's CEO repeatedly and falsely stated that AGN has a golf course at its HQ, demonstrating cost-cutting opportunities.
• Interestingly, TEVA has a golf course near HQ, has a similar mkt cap, and trades far cheaper than AGN.

Amidst the recent news about megadeals in the healthcare industry (VRX' s bid for AGN, PFE's bid for AZN, speculation about AGN's possible bid for SHPG and OTCPK:BAYN bidding for MRK's consumer business, ACT and FRX), we think there is an extremely interest fact pattern regarding TEVA which suggests that TEVA has been hosting potential suitors and may become the next acquisition target.

Facts

1. On 1 May, the Wall Street Journal reported that the CEO of VRX repeatedly and falsely referred to a non-existent golf course at AGN's headquarters when asked about cost-saving opportunities. http://blogs.wsj.com/corporate-intelligence/2014/05/01/valeant-ceo-wants-to-cut-allergans-non-existent-golf-course/
2. As quoted in the same Wall Street Journal article, AGN denied that it has such a golf course.
3. Note that both AGN and TEVA have similar market capitalizations (~$50B).
4. CapIQ shows that as of Friday's close:

• TEVA trades for 9x TEV/EBITDA and 3x TEV/Revenue.
• AGN trades for 23x TEV/EBITDA and 8x TEV/Revenue.
• VRX trades for 22x TEV/EBITDA and 11x TEV/Revenue

This is where we started to do some research, and found some interesting facts:

1. In August 2011, TEVA purchased a 136-acre golf course to build a distribution center. http://www.bsmphilly.com/2011/aug/31/3660-pharmaceutical-firm-buys-golf-course-acreage.html/#.U2Dx5Vf4ocl
2. In December 2012, TEVA scrapped its plan to build a distribution center. http://www.bsmphilly.com/2012/dec/19/6501-teva-backs-out-of-red-lion-center.html/#.U2DyB1f4ock
3. According to TEVA's website, its US headquarters are located at: 1090 Horsham Road, North Wales, PA 19454, USA. (http://www.tevausa.com/Contact.aspx)
4. A Google Maps search from the intersection mentioned in the August 2011 article to TEVA's US headquarters shows that the golf course is ~15 miles from TEVA's US headquarters. https://www.google.ca/maps/dir/1090+Horsham+Rd,+North+Wales,+PA+19454,+USA/Red+Lion+Rd+%26+Sandmeyer+Ln,+Philadelphia,+PA,+USA/@40.1688479,-75.2017206,12z/data=!3m1!4b1!4m13!4m12!1m5!1m1!1s0x89c6a4392ad786f5:0x85305b3a6adde5b4!2m2!1d-75.21869!2d40.229798!1m5!1m1!1s0x89c6b24a72e650e1:0x46292fd90a88104e!2m2!1d-75.0370929!2d40.1068533
5. Pershing Square, led by Bill Ackman, accumulated its stake in AGN using sizable option contracts expiring in 2015. http://www.sec.gov/Archives/edgar/data/850693/000119312514150906/d711603dex992.htm
6. As reported on Yahoo Finance, somebody purchased a large call spread on TEVA last week using the $50 and $62.50 Jan-15 lines. http://finance.yahoo.com/news/teva-draws-long-term-bullish-104534126.html

This all seems far too coincidental to us.

Questions

1. Is it likely that the CEO of VRX (who has recently acquired many companies including Bausch and Lomb for $9 billion, and who has successfully partnered with Ackman) would falsely believe, and repeatedly state, that AGN has a golf course at its headquarters while pitching his largest potential acquisition to prominent sell-side analysts?
2. Is it possible that VRX has done due diligence on TEVA, TEVA is VRX's next target (potentially imminently if its bid for AGN fails), the CEO of VRX has his talking points ready and top-of-mind because they were prepared recently, but VRX's CEO simply mixed up his targets after an extensive Q&A session with leading sell-side analysts?
3. If VRX and TEVA did indeed meet at TEVA's US HQ, how detailed and advanced were their discussions?
4. If they were not detailed or advanced, and since AGN does not have a golf course, what gave the CEO of VRX enough confidence to repeatedly cite a golf course as a source of cost savings at a meeting with prominent sell-side analysts when he was pitching what may become his largest acquisition to-date?
5. If VRX and TEVA had advanced discussions, is it likely that VRX is the only party with whom TEVA has been corresponding? Or has TEVA been speaking with other potential suitors about a transaction for the entire company or part of the company?
6. Has there been other unusual activity recently in TEVA call options? Who could be behind such large call option volumes?

Variant View

TEVA recently reported its Q1/14 earnings. We have not found any references to analysts publishing research regarding TEVA being a potential acquisition target. Therefore, if we are wrong, we do not think that there is any "speculation upside" built into the stock that would be lost if our theory proves to be untrue. More importantly, TEVA already trades at an attractive valuation relative to its peers which was quantified above.

Disclosures

We are long TEVA. We have no interest in any of the other companies listed above. We do not intend to trade securities of any companies mentioned in this article during the next 72 hours.

Comments

[TrustWho]

This writer's speculation has no understanding of TEVA's mission. First, TEVA is not for sale. Second, TEVA will never be sold at a discount to the industry. Third, no one will pay the premium TEVA would require if it is for sale. Fourth, TEVA uses M&A department as a competitive intelligence tool more than an M&A tool.

[pitz]

Everything's for sale at the right price.  Always. 

[pitz]

What is with VRX?  I see them gobbling up everything in sight, probably paying inflated valuations.  The pharmacists I talk to have only seen minimal Valeant-branded products on their shelves and shake their heads at the prospect that this is apparently now one of Canada's largest firms.  Is this a redux of the late 1990s Nortel that used its hot stock to make a series of horrifically bad deals (for their shareholders, certainly not for the shareholders of the acquired companies!)?  Or a true Canadian champion emerging?

[TrustWho]

Nortel

[ebworthen]

136 acre golf course?  Might make a nice unofficial shooting range.

[kurt]

I'm sure the american public is getting to the point where they'd like to make a hole in one.

[knukles]

Hum... False statements to public...  Is he with a bank?  No problem.
Not with a bank?  Might be a problem.
Made a lot of campaign contributions, a bundler?
Could be close, there....