Deutsche Bank Said to Plan Charge From Actavis Sale

Deutsche Bank Said to Plan $528 Million Charge on Actavis Sale
The headquarters of Actavis Group hf stand in Zug, Switzerland. The drugmaker refinanced in 2010. Source: Actavis via Bloomberg.

Deutsche Bank AG will probably book an additional charge of as much as 400 million euros ($528 million) tied to the sale of Actavis Group hf to Watson Pharmaceuticals Inc., people familiar with the process said.

The bank may say it is booking a loss of 300 million euros to 400 million euros on the deal when it reports first-quarter results April 26, said the people, who declined to be identified because talks are private. Watson will probably announce as early as tomorrow that it has agreed to buy Actavis for about 4.5 billion euros, less than the value of the debt Deutsche Bank holds, resulting in the charge, they said.

A sale would allow Frankfurt-based Deutsche Bank, Germany’s biggest lender, to recoup money it loaned to Icelandic billionaire Bjorgolfur Thor Bjorgolfsson to acquire Actavis in 2007. It will also free up capital as Anshu Jain and Juergen Fitschen prepare to become the bank’s co-chief executive officers at the end of May. The deal would create one of the world’s largest producers of generic drugs.

“It’s good to close this chapter, but it would have been better to have done it without charges,” said Christian Muschick, an analyst with Silvia Quandt Research in Frankfurt. “This helps clean things up for the new management. They’re clearly trying to deal with some issues they’ve had for a while and this is one of them.”

Libby Young, a Deutsche Bank spokeswoman, Frank Staud of Zug, Switzerland-based Actavis and Watson’s Charlie Mayr declined to comment.

Earnings Estimates

Deutsche Bank dropped 1.47 euros, or 4.3 percent, to 33.01 euros by 2:20 p.m. in Frankfurt trading, valuing the company at about 30.7 billion euros. The Bloomberg Europe Banks and Financial Services Index, which tracks 43 stocks, fell 2.9 percent.

Deutsche Bank may report that net income fell to 1.55 billion euros in the first quarter from 2.06 billion euros in the same period of 2011, according to the average estimate of eight analysts surveyed by Bloomberg. Pretax profit probably declined to 2.38 billion euros from 3.02 billion euros, based on the average of 12 estimates in recent weeks.

“Client activity is still tracking down on a year-on-year basis, so what really drove the first quarter was a strong trading performance,” said Kinner Lakhani, an analyst with Citigroup Inc. in London who has a “hold” rating on the stock. “The odds are in favor of the rest of this year being better than the prior-year quarters given the notably weak trading performance last year, although the overall environment will continue to be challenging and volatile.”

JPMorgan, Citigroup

JPMorgan Chase & Co., the biggest U.S. bank, reported a 3.1 percent earnings decline for the first quarter on April 13. Citigroup said April 16 that profit fell 2.3 percent. Goldman Sachs Group Inc. said April 17 profit plunged 23 percent.

Goldman Sachs reported a 20 percent decline in fixed-income trading revenue while JPMorgan’s revenue from that business fell 11 percent and Citigroup’s slid 4 percent.

“The first quarter is normally the strongest for an investment bank, but in this environment it is possible that some business will be pushed into the second,” said Muschick. “That all depends on the wider economy and there’s no certainty there.”

Actavis overhauled its business after Bjorgolfsson lost money during the financial crisis, leaving the lender with as much as 5 billion euros of debt, people familiar with the company said in 2009. The drugmaker refinanced in 2010. Deutsche Bank posted an impairment of 407 million euros tied to Actavis in the fourth quarter.

‘Temporary’ Investments

Actavis is part of 12.2 billion euros of non-strategic assets Deutsche Bank holds at its corporate investments unit, according to the company’s report for 2011, published in March.

The unit also includes the Cosmopolitan Resort & Casino in Las Vegas, which the bank foreclosed on in 2008 when developer Ian Bruce Eichner defaulted on a loan, and a stake in Canadian port operator Maher Terminals, which it agreed to acquire in 2007. The units are all held for “investment purposes on a temporary basis,” according to the report for 2011.

The corporate investments unit had 11.8 billion euros of risk-weighted assets at the end of 2011, Deutsche Bank said in the report. Deutsche Bank is working to mitigate an increase in such assets weighted according to risk as banks implement tougher rules on capital, known as Basel III.

Unsolicited Bid

“Actavis should represent about 4 billion euros of risk-weighted assets, so taking a charge of 400 million euros could eat up most of the capital a sale would free up,” said Dirk Becker, a Frankfurt-based analyst at Kepler Capital Markets who recommends investors buy Deutsche Bank shares. “A charge would be very disappointing. I had thought a gain to have been possible after they wrote down Actavis.”

Watson CEO Paul Bisaro said in January the Parsippany, New Jersey-based company was interested in buying either a generic or brand-name drugmaker. “Our appetite for a larger transaction, it’s there,” he said at a JPMorgan health-care conference in San Francisco.

Bisaro said he’s also looking to expand the company’s international reach and its portfolio of brand-name drugs. The U.S. firm approached closely held Actavis in the fourth quarter about a potential bid, the people said.

‘Strategic Rationale’

Watson, which makes the authorized copy of Pfizer Inc.’s cholesterol pill Lipitor, would reap “significant synergies” in the U.S. from an Actavis acquisition and boost its presence in Europe, Chris Schott, a JPMorgan analyst, wrote in a note to clients. The combination has “a strong strategic rationale,” Schott wrote.

Actavis CEO Claudio Albrecht said in an interview in June that he was weighing an initial public offering or pursuing a merger within three years. Albrecht, who moved the company from Iceland to Zug in May, said he would prefer for Actavis to be about triple its current size.

The generic-drug maker has about 850 products on the market and another 350 products under development, according to its website. It makes injectable drugs and creams as well as tablets and capsules.

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