Teva loaded $35B of debt to buy Allergan's generics arm, then wrote down $17B

In July 2015 Teva agreed to buy Allergan's generics unit, Actavis Generics, for $40.5 billion — $33.75 billion in cash and $6.75 billion in shares. To fund it, the Israeli company, already the world's largest generics maker, raised one of the year's biggest corporate bond offerings, in dollars, euros and Swiss francs. The deal closed on 2 August 2016 and pushed Teva's debt to about $35 billion.

The bet was that scale in generics would offset thinning margins. Instead, US generic drug prices came under pressure from insurers and pharmacy-benefit managers, just as Teva needed the cash. Interest on the acquisition debt added hundreds of millions of dollars to its quarterly costs; in the second quarter of 2017 alone, interest expense rose $151 million year on year.

The bill arrived fast. In August 2017 Teva cut its dividend 75%, from $0.34 to $0.085 a share, and the stock fell by almost half within days. It recorded a $6.1 billion goodwill impairment on its US generics business in the second quarter and another $10.4 billion in the fourth — $17.1 billion for the year. In December it announced it would cut roughly 14,000 jobs, about a quarter of its workforce.

Teva went through three chief executives in 2017: Erez Vigodman left in February, an interim followed, and Kåre Schultz arrived in September to sell assets and pay down debt. The case is now a standard example of buying at the top of a market with borrowed money.

Borrowed at the top to buy scale, then margins fell and the fixed debt turned a price dip into a solvency scare, costing $17B writedowns, 14,000 jobs, 75% dividend cut.

Teva paid a peak-cycle price for generics assets just before US generic drug prices fell under insurer and pharmacy-benefit-manager pressure.

The deal was financed mostly with debt, pushing leverage to about $35 billion and adding hundreds of millions in quarterly interest at the worst moment.

Management assumed scale would protect margins; when prices fell, the fixed debt burden turned a downturn into a solvency scare.

Three CEOs in one year kept changing the strategy while the company sold assets to service the debt it had taken on.

Buying scale at the top of a cycle with borrowed money fails when the asset's margins fall: the fixed debt turns a price dip into a solvency scare. The acquirer pays, not the target.

Schultz sold assets, including women's-health brands, to cut debt, and Teva gradually deleveraged over the following years. It stayed the world's largest generics company but at a fraction of its former market value. The deal is taught as a cautionary case on acquisition timing, leverage and the winner's curse in consolidating industries.