Rumours from a variety of sources are circulating that Watson Pharmaceuticals is in talks to acquire fellow generics company Actavis in a deal valued in the region of $7 billion.

Reuters set the ball rolling by citing three unnamed sources who claimed that a deal which would see Watson boost its presence in Actavis' strongholds of central and eastern Europe is close to completion. The Financial Times then quoted "one individual with knowledge of the talks" who said discussions had been going on over the past four months, and a cash deal could be concluded over the next three-five weeks.

The Wall Street Journal's source claimed an agreement after Easter is more likely, while Bloomberg said that Watson has made an unsolicited bid for Actavis. The's latter's unidentified source claimed that there are no other suitors at the moment.

Unsurprisingly, Watson and Actavis are not commenting but most observers believe the deal makes sense for the former which does most of its business in the USA. Chris Schott, an analyst at JP Morgan, issued a research note, saying that "while we need additional financial details of the potential transaction, we believe this combination has a strong strategic rationale and would give Watson the scale it needs to compete globally”.

He added that "we see little in the way of antitrust hurdles to completing the deal as the companies’ European businesses have little overlap, and overlap with the companies’ US businesses appears manageable". Mr Schott also noted that Watson might be able to improve its tax rate, given that Actavis, formerly of Iceland, is now based in Switzerland after going private in 2007.

Watson had sales last year of $4.58 billion, up 29% on 2011, and chief executive Paul Bisaro reiterated last month on an earnings conference call that he has "made it very clear that if the right generic-focused large transaction presented itself, it would help us expand our footprint globally". Actavis, which had turnover in 2011 of around 1.90 billion euros in 2011, expects that to rise to 2.10 billion euros this year.