Warner Chilcott Is Set to Buy P&G's Prescription Drug Unit for $3 Billion

Warner Chilcott Is Set to Buy P&G's Prescription Drug Unit for $3 Billion

Warner Chilcott Is Set to Buy P&G's Prescription Drug Unit for $3 Billion

Specialty drug maker Warner Chilcott Ltd. is expected to announce as early as Monday the acquisition of Procter & Gamble Co.'s prescription-drug business for more than $3 billion, say people familiar with the matter, a sign that the market for loans on more highly levered deals may be loosening.

Six banks, led by J.P. Morgan Chase & Co. and Bank of America Corp. and including Credit Suisse Group AG, Citigroup Inc., Barclays PLC and Morgan Stanley, are expected to put up as much as $4 billion in financing for the transaction. Roughly $3 billion will go toward the acquisition, with the remainder refinancing $1 billion in existing Warner Chilcott debt.

This would be the fourth-largest "leveraged loan" of 2009 in the U.S. and the largest globally for an acquisition, according to data provided by Dealogic. The last leveraged loan of this size for a deal in the U.S. was in April 2008, when Mars Inc. announced its planned purchase of Wrigley.

A leveraged loan is typically defined as a loan made to a borrower with a credit rating below investment-grade or that already carries a good amount of debt.

The deal is one of the larger transactions in a weak summer market for acquisitions. But perhaps its biggest impact will be on the dormant markets for deal financing, which has been largely shut since the mid-September 2008 collapse of Lehman Brothers Holdings Inc. Financing for deals have lately been mostly limited to big companies with strong credit ratings. None of the banks wanted to underwrite this deal alone, but "no bank wanted to miss out," said one person familiar with the matter.

The banks are in part attracted to the transaction because they can demand higher underwriting fees than during the last big deal-making cycle in the middle of the decade, said one person familiar with the deal.

Warner Chilcott is able to absorb those fees because interest rates remain historically low, which keeps the company's overall borrowing costs down despite the banks' additional charges.

Cerberus Capital Management LP and rival drug-maker Forest Laboratories Inc. also were interested in the business, said the people familiar with the matter. But Warner was able to produce the best bid for the Ohio-based unit, which will be run as a wholly owned subsidiary of New Jersey-based Warner.

A key issue in the talks, said these people, was a patent-dispute lawsuit between P&G and generic-drug maker Roxane Laboratories Inc., an Ohio-based subsidiary of Germany's Boehringer Ingelheim. P&G sued Roxane in October 2007 over the P&G drug Asacol, an ulcerative colitis drug. The suit came after Roxane earlier sought approval from the Food and Drug Administration to product a generic version of Asacol. The suit is pending.

P&G was confident in its defense and has won similar cases in the past, including one against Israeli drug maker Teva Pharmaceutical Industries Inc. over Actonel, the osteoporosis treatment for women that is the division's best-selling product.

Nonetheless, Warner Chilcott and Forest wanted the matter settled before inking a deal, said these people, while Cerberus offered a lower price but was willing to take on the potential liability. The status of the matter was unclear Sunday.

A P&G spokesman declined to comment. The company made clear last year it "would look at all options" for the division, said spokesman Tom Millikin.

The deal should boost the profile of Warner Chilcott, which focuses on women's health care and dermatology products. Folding in the division would triple Warner's revenue and give it access to drugs that focus on a range of women's health concerns.

The company recently reported second-quarter profits of $56 million on sales of about $251 million. Its shares trade around 2009 highs of $16.

The P&G unit, which makes roughly $800 million in operating profit, was put on the auction block late last year, in a sales process led by Goldman Sachs Group Inc. It has annual sales of about $2 billion.

P&G has struggled for years to gain a foothold in the pharmaceutical industry, having aborted a 2000 plan to swallow drug makers Warner-Lambert Co. and American Home Products in a three-way deal.