June 17 (Bloomberg) -- Watson Pharmaceuticals Inc. agreed to buy closely held Arrow Group for $1.75 billion in cash and stock, expanding in markets outside the U.S.

Watson, the second-largest U.S. maker of generic drugs, agreed to pay $1.05 billion in cash and issue about 16.9 million common shares, as well as $200 million in preferred stock, Corona, California based-Watson said today in a statement.

The transaction is scheduled to close in the second half of 2009 and would boost earnings in 2010, Watson said. Watson’s deal follows Daiichi Sanko Co.’s purchase in November 2008 of a controlling stake in India’s Ranbaxy Laboratories Ltd. for $5 billion and New York-based Pfizer Inc.’s agreements this year to license more than 150 generic treatments from India’s Aurobindo Pharma Ltd. and Claris Lifesciences Ltd.

“Arrow should give Watson some biogenerics capability and expand its generic footprint internationally,” said Corey Davis an analyst with Natixis Bleichroeder in New York in a note to clients.

Watson rose $1.42, or 4.9 percent, to $30.26 at 4 p.m. in New York Stock Exchange composite trading. The company gained 11 percent in the past 12 months.

Worldwide Operations

Arrow Group, based in London, was founded in 2000 and has operations in 20 countries. It operates as Cobalt Pharmaceuticals in the U.S. and Canada, Arrow Generics in the U.K. and Arrow Generiques in France.

Arrow has the contract to sell the authorized generic version of Pfizer’s Lipitor, the world’s top-selling drug, which could add as much as 30 cents per share in 2012 for Watson, said Davis.

The common shares to be issued in the transaction are valued at $500 million according to the five-day average closing price, the company said in its statement.

Watson also agreed to pay $200 million in the form of a zero-coupon preferred stock redeemable three years after the closing and Arrow shareholders will get a contingent payment based on sales of Lipitor.

Watson said it intends to use available cash and longer- term debt financing. Watson had $559 million in cash and short- term assets at the end of March, according to Bloomberg data.

Banc of America Merrill Lynch Securities is the financial adviser to Watson, and Latham & Watkins is its legal adviser. JP Morgan Securities Inc. is financial adviser to Arrow, and Wachtell, Lipton, Rosen & Katz is legal adviser.

Mylan Inc., of Canonsburg, Pennsylvania, is the largest U.S. maker of generics.

To contact the reporter on this story: Shannon Pettypiece in New York at spettypiece@bloomberg.net

Last Updated: June 17, 2009 16:05 EDT