Teva Takeover Would Send This ETF Soaring

With mergers and acquisitions activity on the uptick, the familiar question of “Who is next?” is being asked. The answer may just be Israeli drugmaker Teva Pharmaceuticals (NasdaqGM: TEVA).

Shares of Teva, the world’s largest maker of generic drugs, surged nearly 10% last week to highest levels in over four years. Volume was 62% above usual as deal-making in the health care sector, namely the $25 billion bid for Forest Laboratories (NYSE: FRX) by generic drugmaker Actavis (NYSE: ACT) stoked speculation Teva could be a takeover target. [A Fantastic Day for Pharma ETFs]

“Speculation is mounting that other drug companies will follow Actavis because they need to make acquisitions to grow and because Teva’s valuation is attractive,” Bloomberg reported, citing Jason Kolbert, a biotechnology analyst at Maxim. Teva trades at a 42% discount to the average global generic drug maker, according to Bloomberg, perhaps making an even more attractive target.

A Teva takeover would be very good news for the iShares MSCI Israel Capped ETF (NYSEArca: EIS) because, simply put, EIS is Teva-heavy. The stock accounts for 27.7% of the ETF’s weight, nearly triple the allocation given to the oldest Israel ETF’s second-largest holding, according to iShares data.

News of a possible acquisition of Teva comes as EIS is facing increased competition from the Market Vectors Israel ETF (NYSEArca: ISRA). EIS is up about 3% this year, but ISRA is up nearly 4%. Although ISRA is not even 10 months old, the ETF has gained a following among investors looking for exposure to Israel because it has ample exposure to the country’s booming technology sector, itself rife with potential takeover targets. [Startup Scene Could be a Boon for Israel ETFs]

ISRA has plenty of exposure to Teva with a 13.6% allocation, but that pales in comparison to the Teva weight offered by EIS.