The hostile takeover attempt for Irvine-based Allergan Inc. by Valeant Pharmaceuticals International Inc. is moving into deeper regulatory waters, something likely to add additional months to the battle and that could even scuttle it.
Canada-based Valeant said last week that the U.S. Federal Trade Commission requested additional information in connection with its proposed bid for the maker of Botox and other drugs.
News of the FTC probe was followed by reports indicating that the Securities and Exchange Commission is looking into Valeant and activist investor Bill Ackman’s Pershing Square Capital Management LP’s bid for Allergan to determine if insider trading is involved, something Allergan alleged in a lawsuit filed Aug. 1.
Second Request
In the FTC matter, antitrust laws require deals over a certain value threshold to be submitted to the FTC and the Department of Justice under the Hart-Scott-Rodino federal law. The FTC didn’t disclose the reason for the “second request” for additional information related to the proposed purchase.
Second requests are uncommon—trade industry observers estimate that fewer than 5% of deals requiring an FTC sign-off get the requests. The agency can issue a second request for information if it’s concerned that a merger or acquisition could significantly reduce competition in a business sector.
Merger and acquisition lawyers familiar with antitrust cases say one reason the review would likely take an extended period of time is that Allergan and Valeant have some 20 overlapping products in markets such as ophthalmology and dermatology.
Allergan said in a news release that “second request investigations typically take some time to conclude and [we] cannot predict how long this investigation will take or how it might otherwise develop.”
Valeant said in a news release that it “will take all actions necessary to obtain regulatory approval for the proposed transaction on a timely basis.”
A 2013 report in the Antitrust Law Journal estimated that, on average, FTC second requests add about five months to the waiting period for proposed deals prior to closing. The journal also said a high percentage of transactions that receive a second request are either subject to some changes or even terminations because of antitrust concerns.
Changes could take the form of divesting some products in order to maintain competitive balance, according to antitrust lawyers the Business Journal talked to.
At the least, the second request is likely to push the bid back, perhaps until sometime in 2015.
Legislation
Another potential deal-ditching scenario was raised last week by analyst Derrick Sung of Bernstein Research, who questioned in a research note whether Valeant’s enthusiasm for Allergan might be dampened if Congress passed legislation designed to prevent companies from merging with overseas firms in order to pay lower taxes to foreign governments.
Allergan Chief Executive David Pyott didn’t take a clear position on inversion during the drug maker’s second-quarter earnings call on July 21.
“One would assume that the U.S. Congress at some point, watching the mass exodus of U.S. companies to lower tax jurisdictions, at some point will act, although I would take the view that that certainly won’t happen in the next couple of months,” he said.
Valeant first announced its pursuit of Allergan in late April. Allergan has rejected Valeant’s offers, saying they undervalue the company, and has declined to meet with Valeant to negotiate.
Valeant raised its bid twice since it announced its intention to buy Allergan, but Allergan management has raised other concerns about Valeant’s business model and reliance on deals for growth.
In terms of the value issue, it’s possible Valeant could increase the cash portion of its bid for the third time, although such a move would largely depend on whether it can secure favorable financing. Valeant’s balance sheet as of the end of the second quarter carried about $17 billion in long-term debt and relatively little cash, about $531 million. The company has also built up its income statement by excluding certain costs, calculations that could make its financials look healthier.
Valeant and Pershing Square are now working to call a special meeting of Allergan shareholders with the intent of ousting six of Allergan’s directors and replacing them with ones more amenable to the hostile bid.
Meanwhile, Allergan, Valeant and Pershing Square are due in court Aug. 20, when a hearing on Allergan’s lawsuit is scheduled.
Allergan said in its suit that Pershing Square bought $3.2 billion of its shares between February and April while being fully aware of Valeant’s takeover intentions. The drug maker said Ackman’s actions deprived selling shareholders of $1.2 billion in value gains.
Allergan is asking the court to declare that Valeant and Ackman violated federal insider trading and disclosure laws and to order a rescindment of Pershing Square’s purchase of Allergan stock.
Valeant said it was “confident that the trading was completely lawful, as our reply to Allergan’s frivolous lawsuit will make clear.”
Pershing Square, which owns 10% of Allergan, said in a statement that there was “nothing illegal, unethical or improper in taking a toehold position before a merger is proposed, even if it is not wanted by the target’s management.”
Allergan declined comment on the SEC matter.
Valeant’s current offer for Allergan is valued at $165 a share, or $49.2 billion, compared with Allergan’s share price late last week of $157.75 a share and a market value of $47 billion.
