Mylan and Germany's Merck - Not a Surprise to Everyone

Word today of a multi-billion dollar deal in the generics industry. Mylan (MYL) is buying Merck KGaA's (not related to the present day U.S. based Merck-MRK) generics drug unit for over $6 bln.

On the one hand, Mylan claims the deal will lead to "a dramatically accelerated growth profile with long-term compounded net income growth expected to exceed 30% per annum and long-term revenue growth in excess of 10%."

On the other hand, Mylan says,

"The transaction is anticipated to be dilutive to full-year cash EPS(1) in year one, breakeven in year two, and significantly accretive thereafter based on management's internal projections. The company is committed to reducing its leverage in the near term through the issuance of $1.5 billion to $2.0 billion of equity and equity-linked securities."

Issuance of up to $2 bln of equity and equity linked-securities gives the impression that MYL longs may be on the defensive come Monday, even if the deal will boost earnings starting in year three.

Whatever the fate of MYL shares on Monday (I think they get smashed), it appears that someone knew some sort of news was coming down the pike in the generics industry. On Friday volume in MYL May 22.5 calls was a busy 3,000+ contracts. More intriguing, was the call activity in Mylan competitor Teva (TEVA) where volume exploded to more than 23-thousand May40 contracts traded. Shares of TEVA, which is based in Israel, rose about 2% on the Tel Aviv exchange today on relief it didn't spend $6 bln for the Merck operations. TEVA passed on the opportunity to buy the Merck KGaA generic business saying,

"Teva's long-held practice is to only pursue transactions that fit our long-term strategy of delivering profitable growth and enhancing our global leadership position while meeting our stringent financial criteria. While Merck's generics business would have been a strategic fit for Teva, the terms of this opportunity did not fully meet our investment criteria."

Those fairly cheap May40 TEVA calls have a chance to perform on Monday.... amazing, the prescience, of those buyers on Friday!

Disclosure: I hold no position in any of the companies mentioned