Tuesday August 25, 04:40 AM

Warner Chilcott buying P&G unit for $3.1 bln

By Ransdell Pierson

NEW YORK (Reuters) - Warner Chilcott Plc, a maker of contraceptives, said it will buy Procter & Gamble Co's pharmaceuticals business for $3.1 billion in a deal that will immediately boost profits and produce tax advantages for years to come, lifting its shares 27 percent.

Ireland-based Warner Chilcott, which also makes an array of female hormone replacement therapies, said P&G -- like itself -- has manufacturing operations in Puerto Rico that confer significant tax benefits.

"The basic strategy is to earn as much income as you can in a low-tax subsidiary and one of the ways you do that is by having the ownership for the intellectual property in a low-tax entity," said Rob Culbertson, a partner in the law firm of Paul Hastings who noted he was not privy to Warner Chilcott's specific tax structure.

P&G's branded drugs, including osteoporosis treatment Actonel and Enablex for overactive bladder, have annual sales of $2.3 billion. Warner Chilcott, which will finance the deal through bank loans, has annual revenue totals about $1 billion. The deal is slated to close in November.

"The acquisition transforms Warner Chilcott into a global pharmaceutical company, expands our presence in women's health care, establishes us in the urology market in advance of the anticipated launch of our erectile dysfunction treatments, and adds gastroenterology therapies to our product portfolio," Warner Chilcott said in a statement.

P&G failed to realize its ambition of becoming a major force in pharmaceuticals, although Actonel became one of the world's top-selling treatments for prevention of fractures in post-menopausal women.

Cincinnati-based P&G, best known for its vast array of household consumer products, such as Tide detergent and Crest toothpaste, said it is selling its branded medicines to "prioritize" investments in its consumer health-care businesses.

Warner Chilcott officials told investors on a conference call that modest capital expenditures and strong cash flow would help it gradually repay the $3.1 billion in debt it is taking on to finance the deal.

The six banks are: J.P. Morgan, Bank of America, Credit Suisse, Morgan Stanley, Barclays and Citi, according to Loan Pricing Corp.

Earlier, sources said the six banks will provide up to $4 billion of financing, including $1 billion to refinance Warner Chilcott's existing debt. The financing is expected to be split equally between a leveraged loan and high yield bonds, LPC said.

Warner Chilcott said in a regulatory filing that the banks would supply senior secured credit facilities of $2.75 billion comprised of $2.5 billion in aggregate term loan facilities and a $250 million revolving credit facility.

The company said a group of banks have also committed to provide a senior unsecured bridge loan of up to $1.4 billion.

The companies said the majority of the 2,300 employees in P&G's pharmaceuticals unit are expected to transfer to Warner Chilcott.

"For Warner Chilcott, the acquisition expands its presence in existing specialty pharmaceutical markets and provides access to new physician offices in 14 countries," the companies said.

Warner Chilcott said if the deal does not close by Dec. 31 it must pay a termination fee under certain conditions.

P&G said the deal will give it a one-time after-tax gain of $1.4 billion, or 44 cents per share. But it also expects profit to be reduced by 10 to 12 cents per share in fiscal 2010 due to lost earnings from the pharmaceuticals business.

The transaction will increase P&G's ability to repurchase shares, Chief Financial Officer Jon Moeller told investors on a conference call. He said other top priorities for cash are to reinvest in its business and to pay dividends.

Shares of Warner Chilcott closed up $4.35 to $20.41 on the Nasdaq. Procter & Gamble shares slipped 24 cents to $53.34 on the New York Stock Exchange.

(Additional reporting by Brad Dorfman in Chicago, Bill Berkrot in New York and Kim Dixon in Washington)