Time, it seems, is on Allergan Inc.’s side.
That much started to come clear last week when activist investor Bill Ackman set off a ticking clock in the background of his hostile takeover bid for the Irvine-based drug maker.
Other indicators of the sort of advantages that might accrue to Allergan as time wears on also came into focus. Ackman pointed one out when he complained that a number of conditions of Allergan’s bylaws amount to “the most onerous” obstacles among U.S. companies on calling a special meeting.
Ackman owns 9.7% of Allergan through his Pershing Square Capital Management LP hedge fund in New York, and he’s teamed up with Canada-based Valeant Pharmaceuticals International Inc. in the takeover attempt.
Ackman seeks to use the special meeting to call for the removal of six of Allergan’s nine directors. He needs to get at least 25% of shareholders to hold the meeting, and he likely needs a healthy cushion because the “yes” votes must hold on to their stock until the meeting in order to count toward the threshold.
Allergan has a few more tools at its disposal to hold off the takeover, though. Chief among them: the right of the board to delay any meeting for 120 days after it receives an official request.
Ackman’s best-case scenario now envisions a call for a special meeting to gain sufficient support by mid-August. Allergan’s current board could delay that until at least December, given the 120-day option.
That’s tough enough for Ackman, who sees another problem shaping up: Last week he raised concerns that Valeant might lose commitments to favorable financing, which could scuttle his part in the bid.
That suggested the ticking clock, especially when considered in light of expectations that interest rates will continue upward in coming months.
Financing
Favorable financing looks to be a key to the deal since Valeant already has about $17 billion in debt and less than $1 billion in cash. It likely will need more cash to get the deal done because its current bid—$72 in cash and 0.83 of its shares for each share of Allergan—looks stuck at just more than $50 billion. That’s below the low range of expectations among Allergan investors, and Valeant’s shares finished last week down more than 10% from their high since the takeover bid was announced in April.
“Valeant has committed financing, but commitments don’t last forever,” Ackman said. “There’s risk—we’re in a very bullish credit environment right now … that can change, effectively, overnight.”
Ackman would have another steep hill to climb, even if Valeant’s financing holds together as he gets the votes for the special meeting and succeeds in removing the six. That’s because Allergan’s bylaws call for the three remaining directors—Chairman and Chief Executive David Pyott, along with Peter McDonnell and Timothy Proctor, who joined the board last year—to fill the vacant seats. They require no shareholder approval.
That could be the final key to Allergan’s defense—and might explain Ackman’s recent sense of urgency.
Indeed, Ackman’s comments came after several public moves that appeared to be designed to boost Valeant’s shares had little effect on the market.
Ackman’s fellow hedge funder John Paulson—who has amassed a 2% stake in Allergan and pledged to back the takeover bid—told various outlets of the financial press that he thinks Allergan’s shares could rise nearly 40% if the deal goes through.
Valeant also announced that its Bausch & Lomb Inc. subsidiary received Food and Drug Administration clearance for sales of a device used in cataract surgery.
Messages
Meanwhile, Ackman sent two separate messages to Allergan’s board—a letter and a webcast, both made public—complaining over its cool response to Valeant’s bids and the bylaws that make it difficult to call a special meeting of shareholders.
Valeant’s shares were up less than 1% for the week as the end of the trading day neared on Friday. That put its offer at about $51.5 billion—still short of the range of expectations among analysts and shareholders, according to recent reports.
Another possible hurdle for Valeant could surface at anytime, with Allergan on the hunt for an acquisition that could put it out of reach altogether.
