The transaction with Endo Health Solutions Inc. caused the shares of both companies to surge in Tuesday trading.
Paladin's (TSX:PLB) shares soared nearly 50 per cent, rising $31.59 to close at $95.50 on the Toronto Stock Exchange, while Endo (Nasdaq:ENDP) closed up $12.58, or about 29 per cent, at US$56.22.
Under the deal, Paladin shareholders get about 22.5 per cent of a new Irish company that will own both Paladin and Endo, plus some cash and shares of a new Canadian company.
Endo's current management team will lead the overall company and Paladin will be a separate operating company led by its current management at its headquarters in Montreal.
"We're also proud of this agreement which marks the beginning of a relationship with Endo where we will work together to expand our proven business model globally," stated Mark Beaudet, interim CEO of Paladin who will continue to run the company.
Paladin chairman Jonathan Ross Goodman will become an adviser to the new Endo board but will not have an operational role in the Canadian business. The founding Goodman family, which controls 34 per cent of Paladin's shares, have agreed to support the deal. Two-thirds of Paladin's shareholders must support the deal and a majority of Endo shareholders.
"It takes about 17 years of tough, hard work by many talented people to become an overnight success. We're proud that we were able to record 17 years of consecutive record revenues which drove a 51 times increase in Paladin's share price since our founding," added Goodman.
Endo says the transaction will create an international specialty pharmaceutical company and deliver $75 million of annual tax savings from taking Paladin private and tax savings from shifting Endo's headquarters to Ireland where the company's tax rate is expected to be about 20 per cent.
"The announced acquisition of Paladin labs is an exciting deal for Endo that accelerates our goal of becoming a top tier specialty health-care company," said Paladin president and CEO Rajiv De Silva in a conference call.
He said Paladin will continue to work to expand its presence in the Canadian market and will gain access to the U.S. markets to accelerate its growth. While the majority of Paladin's revenues are generated in Canada, its international footprint in Latin America and South Africa are also valuable.
Current shareholders of Endo will own 77.5 per cent of the Irish holding company and the rest would be owned by Paladin's current shareholders.
Each Paladin share would be exchanged for C$1.16 cash, 1.6331 shares of the "New Endo" and one share of Knight Therapeutics Inc., a newly formed Canadian company that will be split off separately.
Investors in Endo Health Solutions Inc., which is based in Malvern, Pa., will receive one share of stock in the new Irish company, for each of their Endo shares.
The offer which equates to C$77 per share represents a 20 per cent premium Paladin's Monday closing share price of C$63.91 and a 25 per cent premium to the three-month weighted average of C$61.67 per share. But the value of the deal could increase to C$85 to C$90 per share because of the appreciation in Endo's shares, said an industry analyst.
Philippa Flint of Bloom Burton said the deal is "very attractive" and expects it will be consummated after receiving regulatory and shareholder approvals.
"We recommend Paladin shareholders vote in favour of the transaction or take profits on this news. Since the majority of the consideration is in Endo shares, and they are up over 10 per cent on the news, shareholders may want to take profits in advance of the deal closing," she wrote in a report.
Paladin produces treatments for pain, urology and allergy, and it has a strong pipeline of new product launches set to take place over the next 12 months, Endo said.
There is no overlap between the two companies since none of Paladin's products are sold in the United States.
No details about a break fee were provided.
Endo wants to accelerate its expansion at home and abroad and the acquisition of Paladin is expected to immediately boost profit in 2014.