Allergan Owners Left Wanting More From Valeant: Real M&A

Valeant Pharmaceuticals International Inc.’s bid for Allergan Inc. gives the maker of Botox a valuation it hasn’t had since early 2008 -- and investors still expect more.

Allergan shares yesterday climbed 1.8 percent above Valeant’s cash-and-stock offer, signaling traders are anticipating a higher bid. Valeant’s proposal stood at $48 billion, or almost $161 a share, and when announced, valued Allergan at 21 times its profit, according to data compiled by Bloomberg. Sterne Agee Group Inc. said the offer is too low because Allergan has appealing growth prospects as a stand-alone entity. Shareholders may demand a price closer to $180 a share, said Cowen Group Inc.

“Allergan is probably one of the best companies in our space,” Shibani Malhotra, a New York-based analyst at Sterne Agee, said in a phone interview. “They will do everything they can to fight this.”

Valeant may need to put up a fight, too. Sanofi, Nestle SA or GlaxoSmithKline Plc could swoop in as white knights, Malhotra said, while Morningstar Inc. sees Novartis AG and Johnson & Johnson as possible counterbidders. Another way to fend off Valeant and Allergan’s largest shareholder Bill Ackman, who supports the offer, is for Allergan to make its own acquisition of a company outside the U.S. with a lower tax rate, a tactic some of its peers have used, Jefferies Group LLC said.

Deal Details

Valeant is offering Allergan investors $48.30 in cash and 83 percent of a Valeant share for each one of Allergan. The value of the transaction is constantly changing because of the stock component. It stood at about $47 billion, after subtracting Allergan’s net cash, at the close of trading yesterday.

Based on stock prices before the announcement, the transaction valued Allergan at 21 times its trailing 12-month earnings before interest, taxes, depreciation and amortization, data compiled by Bloomberg show. The last time Allergan had that multiple was more than six years ago, the data show.

Valeant, the drug industry’s busiest dealmaker since 2010, has teamed up with Ackman’s Pershing Square Capital Management LP, which has a 9.7 percent stake in Allergan. While Valeant already has the hedge fund’s support, other shareholders are betting a deal won’t get done at the current deal terms.

For potential white knights, having Ackman’s backing would help, given that his firm is now the largest shareholder in Allergan.

Ackman Stake

Ackman told a conference yesterday that he is contractually committed to support Valeant’s deal, “unless and until there is a superior offer that Valeant chooses not to respond to.” If Allergan’s shareholders deem any potential competing bid superior and Valeant chooses not to participate, “I guess we’d be cashed out in that deal,” he said.

Valeant’s proposal may need to be raised to about $180 a share to win over Allergan shareholders, according to Ken Cacciatore, a New York-based analyst at Cowen.

“Allergan likely does have a strong case to make to push back on this transaction,” he wrote in a report yesterday. “However, its shareholder base would likely be willing to settle for this bidder if the price could get closer to the $180 level.”

Stock Moves

Allergan’s stock rose yesterday to $163.65, 1.8 percent higher than the bid. That price gap, or negative spread, was the widest among acquisitions in North America larger than $3 billion that have yet to close, data compiled by Bloomberg show.

Today, Allergan shares were unchanged at 10:37 a.m. New York time.

Laurie Little, a representative for Valeant declined to comment, when asked if Valeant would consider raising its bid.

“We are confident that the proposed Valeant/Allergan combination offers compelling value for both sets of shareholders,” she said in an e-mailed statement. “We are committed to pursuing this combination and intend to take all steps necessary to complete the transaction.”

There’s a high likelihood that Allergan will rebuff the unsolicited offer as is, which may force Laval, Quebec-based Valeant to raise it or may create an opportunity for other interested suitors, said Michael Waterhouse, an analyst at Morningstar.

Allergan today adopted a one-year shareholder rights plan to help thwart a hostile takeover.

“Allergan is seen, in the specialty pharmaceuticals space at least, as probably one of the best managed and one of the best opportunities,” Waterhouse said in a phone interview. “It could stir a little bit of thought from J&J and Novartis that maybe they don’t want this one to get away.”

Counterbidder Fits

J&J announced earlier this month that that it is ending development of PurTox, a potential competitor for Botox. That may make an acquisition of Allergan even more compelling for the company, Waterhouse said.

Novartis may be tempted to bid to gain Allergan’s ophthalmology assets, which include Restasis eye drops, he said. Novartis yesterday agreed to buy cancer drugs from Glaxo for as much as $16 billion, while selling most of its vaccines division to Glaxo and its animal-health unit to Eli Lilly & Co. Glaxo and Novartis also will form a consumer-health joint venture.

Allergan, which also makes products to treat acne and psoriasis, would be a good fit for European drugmakers Sanofi and Glaxo, as well as Nestle, which said in February it’s taking full control of its Galderma skin-care joint venture with L’Oreal SA, Malhotra said. While Allergan’s Botox injection is known for treating wrinkles, it also is used for chronic migraines and overactive bladders.

Brazen Buyer

Representatives for Irvine, California-based Allergan and New Brunswick, New Jersey-based J&J, as well as Paris-based Sanofi, London-based Glaxo and Basel, Switzerland-based Novartis said their companies don’t comment on speculation. A representative for Vevey, Switzerland-based Nestle didn’t respond to a request for comment after normal business hours.

“What you need is somebody brazen enough that sees this opportunity to kind of stick it to Valeant and that has the firepower Valeant has,” Sachin Shah, a special situations and merger arbitrage strategist at Albert Fried & Co. in New York, said in a phone interview. “If Allergan can’t find a white knight, the question will turn to, ‘What can we acquire?’”

Often speculated targets are Alkermes Plc and Jazz Pharmaceuticals Plc because of their domicile in Ireland, where the corporate tax rate is 12.5 percent, less than the U.S. Malhotra of Sterne Agee says those companies may be too small for Allergan to use as a vehicle for a tax inversion deal, though Dublin-based Shire Plc would be a possibility. Shire had a market value yesterday of about $31 billion, versus Alkermes at $6.8 billion and Jazz’s $8.7 billion.

Pharma Deals

A representative for Alkermes didn’t respond to a request for comment. Representatives for Jazz and Shire said their companies don’t comment on speculation, when asked whether they’ve been approached by Allergan.

Valeant’s offer for Allergan comes amid a deal frenzy among drugmakers. About $141 billion of corporate takeovers in the pharmaceutical industry were announced or proposed in the 12 months through yesterday, according to data compiled by Bloomberg. That’s the highest for a 12-month span since 2009, and four times the volume in the same period last year.

“Valeant has disrupted the standard specialty pharma business model, and in this case they’ve added a new wrinkle with Ackman being involved,” David Steinberg, a San Francisco-based analyst for Jefferies, said in a phone interview. “Either a white knight may emerge as they put Allergan in play, or Allergan may try to purchase something.”

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