What happened
Shares of Mylan (MYL) had jumped 7.5% higher as of 11:26 a.m. EDT on Monday after rising as much as 18.5% earlier in the day. The nice gain came after Mylan and Pfizer (PFE -3.30%) announced plans to combine Pfizer's Upjohn unit with Mylan in an all-stock transaction.
So what
Mylan has struggled for a while with a challenging generic drug market, in the U.S. especially, weighing on its growth. The proposed transaction will combine Mylan with Upjohn, the Pfizer segment that focuses on off-patent branded and generic established medicines, to create a new global pharmaceutical company.
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The new company should have annual revenue of between $19 billion and $20 billion right out of the gate. Mylan's total revenue last year was $11.4 billion. However, Mylan shareholders will own 43% of the combined company. This means that their portion of the combined revenue will be less than the revenue Mylan is making as a stand-alone entity.
So why are investors excited about the deal? It comes down to the bottom line. Pfizer's Upjohn unit is quite profitable, even though it's not generating growth right now. Pfizer and Mylan haven't projected what the new company's earnings will be, but they anticipate 2020 adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) will be between $7.5 billion and $8 billion. That's much better than the adjusted EBITDA of $1 billion that Mylan delivered last year.
In addition, Mylan shareholders don't receive a dividend right now. But the new company intends to initiate a dividend that pays out around 25% of free cash flow beginning the first full quarter after the close of the transaction. With free cash flow projected to be more than $4 billion, the combined company should pay out at least $1 billion in dividends over its first full year of operations.
Now what
The deal isn't done yet. Mylan's shareholders must vote to approve the transaction, and regulators must also give their thumbs-up. However, Pfizer and Mylan anticipate that the transaction will win these approvals and close in mid-2020.
