Investor sentiment appears to be quietly moving away from the increasingly noisy takeover attempt of Irvine-based Allergan Inc.
The trend took hold last week, when much of the financial media remained riveted on the drama behind the Botox maker’s effort to fend off an unwanted bid from Canada-based Valeant Pharmaceuticals International Inc. and activist investor Bill Ackman, who owns 10% of Allergan through his Pershing Square Capital Management LP.
Allergan filed a lawsuit that accused Ackman and Valeant of insider trading, an allegation that appeared to gain some traction among deal watchers.
Then a couple of New York-based proxy advisory firms—Institutional Shareholder Services Inc. and Glass Lewis & Co.—gave what amounts to an assist to the would-be raiders with recommendations for Allergan shareholders to call the special meeting that Ackman and Valeant have sought.
The back-and-forth all but obscured steady declines in share prices for both Valeant and Allergan before an updraft last Friday, when Allergan shares were upgraded to “outperform” by Leerink Swann LLC. Valeant shares saw a smaller increase late Friday, but their weeklong trend line remained down, leading at least one analyst to wonder if the bid will fizzle altogether.
Prospects
“Based on our conversations with investors, we believe the prospects of a Valeant deal are diminishing and investor sentiment seems increasingly negative on deal prospects,” said David Maris, an analyst with BMO Capital Markets in New York, in a research report.
A dip in Valeant’s share price means a direct reduction in its offer for Allergan, since the bid is made up of $72 in cash and 0.83 shares of its own stock for each share of Allergan.
Valeant shares were down about 6% to around $109 toward the end of last week. That put the value of its bid for Allergan near $162 a share, or about $48 billion.
Allergan shares, meanwhile, had seen a run up sparked by Valeant’s takeover attempt until recent weeks. Their decline for much of the week likely reflected a general view that the chance of the deal falling by the wayside has grown. Allergan’s late rally still left its shares down nearly 5% toward the end of the week to about $157 a share, for a market value of about $46.7 billion.
The dual drops put Valeant’s bid in the neighborhood of an underwhelming 3% premium on Allergan’s current value. That’s about $36 a share—about $11 billion—short of Allergan’s potential market capitalization of $59.1 billion, based on a Business Journal compilation of recent analyst projections for the next year or so.
“With a lower share price, we believe the prospects of Valeant’s raising the bid for Allergan via the share ratio have diminished, and with Valeant recently lowering its [earnings per share] guidance, we think the prospects of it raising the cash portion (via increased debt) have also diminished,” Maris said.
Valeant’s lowered guidance—which touched off the recent tumble of its shares on July 31—led to another hit last week.
Pyott’s Approach
Allergan Chief Executive David Pyott continued his selective approach on public relations, making public a critique of Valeant’s second-quarter earnings report compiled by forensic accountants and other financial experts.
“In Allergan’s view, Valeant’s ongoing failure to provide complete, fully transparent information and relevant supporting data for its performance remains a significant and growing concern among Allergan’s stockholders and the overall investment community,” Allergan said in its statement.
Criticisms
Other key criticisms included:
• An “overwhelming divergence” between Valeant’s reported generally accepted accounting principle and adjusted results, “additionally highlighting the opaqueness of Valeant’s financial reporting.”
• Valeant’s failure “to provide quantitative price/volume sales analysis and market share statistics for its Bausch & Lomb business.”
Allergan’s release mentioned that Valeant had announced preliminary second quarter organic growth of 12% for Bausch “without providing supporting dollar results.” Later data indicated that actual organic growth at Bausch was 9.7%, going to $891 million from $812 million in 2013’s second quarter.
Valeant “assumed consistent quarterly performance” for certain products rather than excluding them as discontinued operations from their calculation, according to Allergan.
• Valeant’s reliance on deals for growth.
“Valeant included further acquisitions in its guidance, thereby confirming that Valeant does not have sufficient organic growth and needs to rely on acquisitions,” Allergan said, noting that Valeant’s guidance included $5 billion in deals in 2015 and $10 billion in acquisitions in 2016.
Valeant shares—which had regained some ground after tumbling 10% on the day of the company’s own release of the second-quarter results—dipped by another 4% in the wake of Allergan’s critique.
Valeant did not return calls seeking comment and did not issue a response to Allergan’s press release.
Pyott declined further comment on Allergan’s release.
Allergan’s criticisms “seem well-founded, in our opinion,” Maris said.
His report for BMO mentioned a June 17 conference call in which Valeant Chief Executive J. Michael Pearson said he was “very confident that we will meet expectations in the [second quarter] and the rest of the year.”
Maris noted that Valeant lowered its profit guidance six weeks later.
Cash on Hand
Last week’s action came as Allergan continued attempts to put together an acquisition of its own—a move that would hold the potential to stop Valeant’s pursuit in its tracks. Allergan boasts an enviable balance sheet, with $3.2 billion in cash and equivalents and investment-grade credit.
Allergan investors have a “first order of preference … for a meaningful strategic acquisition that provides for accretion and further shareholder value,” Pyott recently said. “With many alternatives available, we’re presently pursuing various options.”
