Expect Valeant Pharmaceuticals International Inc. to go into overdrive this week as it takes its hostile takeover bid for Allergan Inc. directly to shareholders of the Irvine-based drug maker.
The solicitation comes during a skirmish in the financial press between the two companies. The fight is playing out against what some observers view as a ticking clock that favors Allergan, since year-to-year financial comparisons for Valeant are expected to get tougher once its acquisition of Bausch & Lomb Inc. reaches its first anniversary this summer.
Other factors that could put time on Allergan’s side: a recent downward trend for Valeant shares that continued until a late uptick last week, and renewed chatter that Allergan could pull off a big acquisition of its own.
The decision to go directly to shareholders—announced with much fanfare by Laval, Quebec-based Valeant and activist investor Bill Ackman, who owns about 10% of Allergan through his Pershing Square Capital Management LP—came about a week after Allergan’s board flatly rejected a second sweetened offer.
The latest bid called for $72 per share in cash and 0.83 shares of Valeant for each share of Allergan.
The cash portion of the offer amounts to about $21.4 billion. The fractional value of the Valeant shares in the deal equated to about $30 billion late last week, putting the total offer at about $51.5 billion.
Allergan had a market value of about $48 billion late last week.
A recent survey of Allergan investors by JPMorgan Chase indicated an offer in the range of $53.5 million to $59.5 million could win their approval.
Pearson
Valeant Chairman and Chief Executive Michael Pearson offered no indication that a third sweetened offer is coming.
“We believe Allergan’s stockholders should have the opportunity to express their views and we are confident that Allergan’s stockholders will support this combination,” Pearson said in a company statement.
Allergan responded that its directors would “carefully review and evaluate” Valeant’s “unsolicited exchange offer” in connection with its financial and legal advisers.
“Allergan stockholders are advised to take no action at this time pending the review of the exchange offer by the board,” the drug maker said.
Ackman and Pershing Square also began mailing proxy solicitations last week to call a special shareholder meeting with an eye toward ousting six of Allergan’s nine directors—a second prong in its strategy.
It could force a meeting with approval from shareholders representing 25% of Allergan’s stock. Ackman on his own already has a nearly 10% stake.
Pearson conceded that Valeant’s latest bid lags the range laid out by JPMorgan Chase, which has become a benchmark of sorts on a potential deal. But he told the Financial Post in Toronto that he’s counting on getting the special meeting convened to help boost the offer.
“Yes, the [bid] now is less than [the JPMorgan Chase range]—but that’s just a function of sort of all the noise I think Allergan’s making right now,” Pearson said, adding that he believed Allergan and Valeant’s stock prices would rise once a special meeting date was set.
The “noise” included releasing correspondence between Allergan Chairman and Chief Executive David Pyott, Chief Financial Officer Jeffrey Edwards, and a pair of Morgan Stanley bankers who have since signed on to advise Valeant. The bankers suggested that Allergan should take a tougher line in public about Valeant’s business model and growth prospects. They also referred to Valeant as a “house of cards.”
Valeant has said in Securities and Exchange Commission filings that a special meeting could take place in August, although Allergan can delay any meeting until November.
Pershing Square, meanwhile, is awaiting word from a federal judge about whether its plans to call a special meeting could trigger a “poison pill” that Allergan’s board adopted earlier this year. A hearing on that matter is scheduled for July 7.
Alex Arfaei, who follows Valeant for BMO Capital Markets, called Valeant’s recent actions “positive,” given what has happened to the drug maker’s shares “and its potential missed opportunities while focused on Allergan.”
Some analysts have set Aug. 6—the anniversary of Valeant closing its $8.7 billion acquisition of Bausch—as a deadline for Valeant to complete a deal for Allergan. Valeant’s growth could dry up once Bausch’s revenue figures fully into year-to-year comparisons.
“Valeant’s organic growth is small,” David Maris, an analyst with BMO in New York, said in a report issued after a Valeant conference call addressing what it referred to as Allergan’s “misconceptions” about Valeant’s business model and research and development plans.
Valeant’s growth besides revenue from acquisitions was 1% in the first quarter, which makes “some Allergan shareholders concerned that the stock they would receive in a deal is that of a company that is showing concerning trends, not strength,” Maris said.
Maris also hinted at the potential for Allergan to make an acquisition of its own.
“We suspect Allergan has a number of more attractive options it is exploring and expect that, combined with continued earnings execution and pipeline developments and given the likely extended timeline, Allergan still holds the advantage,” he said.
The possibility of Allergan making its own deal to blunt Valeant’s advances flared up again last week.
Shire
The stock of Ireland-based drug maker Shire PLC surged after analyst John Boris of Atlanta-based investment bank SunTrust Robinson Humphrey predicted in a client note that an Allergan bid for Shire was “imminent.”
Boris wrote that an acquisition of Shire would be better for Allergan shareholders than the proposed hostile Valeant takeover. He noted that the Irish company would hold the potential for a tax benefit similar to the one Valeant gets through having its headquarters in Canada.
“Following an acquisition of Shire by Allergan, the combined company would have sustainable, transparent revenue growth of about 10%, a diversified sales mix, high value research and development programs and a tax inversion.”
