Valeant-Zoetis Combination Has 'Accretive' Upside

has approached

for a potential takeover, according to The Wall Street Journal. Neither company has released an official statement regarding the same. In a report published Friday, JPMorgan analyst Chris Schott said that Zoetis would add "an attractive growth business" that can generate a top-line CAGR of 5-7 percent over time and represents "another pillar of growth." "Zoetis is a diversified business in an industry with a number of attractive characteristics that fit Valeant's target profile." Schott added, however, that there was limited overlap with Valeant's existing businesses, which makes it difficult to estimate "the level of incremental synergies" that can be achieved from such a deal. Schott expects a Zoetis acquisition to be roughly neutral to the 2018 EPS estimate. JPMorgan maintained an Overweight rating on Valeant, with a price target of $250, and a Neutral rating on Zoetis, with a price target of $50. In another report BMO Capital Markets noted, "While we've repeatedly identified Zoetis as a potential target for Valeant, we are somewhat surprised by the timing of this potential deal. Valeant is still digesting Salix, and its leverage is quite high, but it appears that Valeant is being opportunistic…again." Analyst Alex Arfaei estimated the potential takeout price at around $60 per share, which Valeant could pay with a cash/stock mix of about 60/40. Arfaei added, however, that the potential deal would not be "significantly accretive" for Valeant, "assuming opex synergies of ~$300/$400MM in 2016/2017 on top of Zoetis' operational efficiency initiative, and 7% combined tax rate." The deal could boost shareholder value because "it should lead to VRX multiple expansion." BMO Capital Markets maintained an Outperform rating on Valeant.