Teva (TEVA) makes great progress in addressing its troubles after it really became evident in recent months that the $40-billion acquisition of the generics business of Allergan (AGN) put the company under real stress.
Last week the company already announced a +$1-billion divestiture, the appointment of a reputable CEO, and favourable news from the FDA. Another round of divestitures lowers the absolute debt levels. The progress, in terms of a reduction in the leverage ratio, is much lower as a result of divested earnings power.
The quick pace of action is to be applauded as the board understands the severity of the situation. While nearly $2.5 billion in divestitures is a serious amount, Teva's debt load remains high as the divested earnings power makes that leverage multiples come down by just 0.2 times. This shows that further work needs to be done and that Teva should not rush too much in selling assets. While the asset sales reduce debt and reduce the probability of a catastrophic outcome, they limit the upside potential for the same equity holders at the same time.
