Warner Chilcott (WCRX)

On August 24th Proctor & Gamble (PG) agreed to sell their pharma division to WCRX. This is a terrific move for both companies.

PG’s pharma unit was too small for this giant company and the ongoing political tantrums in the healthcare sector make it a problematic division that could take PG’s focus off of more important areas.

For Ireland based WCRX, however, this is a unique opportunity to greatly expand the footprint of the company by expanding into new markets and acquiring new products.

We’re bullish because this looks like a terrific deal and private lenders are stepping up for the first time in over a year to help finance an acquisition.

WCRX is paying PG $3.1B and will borrow the entire amount. But the cash flow from PG’s pharma unit should pay down the loan by itself within about five years.

And the price tag represents only about half the PE of WCRX itself. Investment bank Jefferies feels that the deal will be accretive to FY 10’s earnings by at least $1.55 per share. WCRX’s estimates are currently at $1.82 per share for next year. Jefferies therefore sees at least $3.37.

Technically we wish price had traded in a tighter range these last few weeks. The stock had moved over 17% off its highs at one point, a bit steep for out taste given this setup. But we like that price is turning off the 20 MA and would buy over Friday’s high with a stop below $18.50.