Published On: Tue, Apr 22nd, 2014

Bill Ackman Joins Valeant Pharmaceuticals In $47 Billion Bid For Allergan Maker Of Botox

BILL ACKMAN screen shot

For its last pharma industry consolidation acquisition play, in May 2013 Laval Quebec based Valeant Pharmaceuticals International Inc, led by CEO Mike Pearson, picked up eye products Bausch & Lomb from New York private equity firm Pincus Warburg for US$8.5 billion in a highly leveraged transaction. This brought person’s total acquisitions at the company to US$19 billion since 2008.

Even with 17 billion of debt resulting after the Bausch & Lomb deal, the shares are well liked and, over the last four years alone, have risen about nine times from under US$15 to a current price of just over US$132 per share. Even in the generally recovering market we have had that is still impressive.

Along the way private investment firm Ruane, Cunniff & Goldfarb whose Chairman and CEO is Robert Goldfarb became Valeant’s largest shareholder. Ruane Cunniff & Goldfarb also runs the legendary Sequoia fund, which has regularly outperformed the S&P 500 for the last 40 years or so.

Famously in 2011 Goldfarb said he sometimes likes to back jockeys and not horses, and obviously then took a liking to ex Mckinsey consultant Mike Pearson.

As Valeant own total equity market capitalization sits currently at somewhere over US$44 billion, Robert Goldfarb must indeed be pleased with the outcome to date.

We learned today that another New York hedge player Bill Ackman has joined the Valeant band-wagon. His Pershing Square Capital Management has just announced it has quietly acquired almost 10% of the shares of Irvine California based Botox maker Allergan in the last two months.

Now Pershing Square and Valeant are also jointly bidding to acquire the whole of Allergan in a hostile takeover bid at a bid price valued today, at the time of writing, at almost US$158 per share in a cash and stock, with the proposed deal worth in total therefore just over US$47 billion.

The acquisition proposal would offer US$48.30 in cash and 0.83 shares of Valeant common stock (with this fraction worth some $109.60 today) for each share of Allergan. Today Allergan’s 298.3 million outstanding shares are trading at just under US$164 per share on the New York Stock Exchange, up about 15% since the announcement.

Valeant says this is a “substantial premium” over the US$116.63 share price of Allergan as of April 10, which is the day before Ackman’s Pershing Square Capital crossed the 5% threshold ownership reporting level and commenced a rapid accumulation program leading to today’s official disclosure.

Pershing currently has a 9.7% stake in Allergan. In addition, the shares are now held by a new jointly-owned corporate holding venture between Pershing and Valeant called PS Fund 1.

With Ackman doing the front running on the initial share acquisitions, it seems the point at which disclosure had to be made was extended a little compared to if Valeant had simply done it itself. This helped the initial accumulations, both in terms of minimizing the impact on cost and in terms of keeping the Allergan board on the back foot, who seem to have been taken completely unawares by the development.

Mike Pearson said earlier today with the announcement “We firmly believe that combining Valeant and Allergan would create an unrivaled platform for growth and value creation in health care, and we look forward to finalizing and announcing the terms of our proposal shortly, ” Valeant said earlier today.

“Together, we can capitalize on the inherent strengths and complementary portfolios of our two companies, while achieving significant synergies by applying Valeant’s unique operating model to a combined set of assets, ”

However Valeant are already touting cost synergies in the deal, and says it expects to realize at least US$2.7 billion in annual cost synergies, with 80% achieved in first six months. Allergant may be realistically be expecting the post-merger axe to fall on them first, which might now dampen their enthusiasm a bit for the bid.

Accordingly it seems that so far the response from Allergan has not exactly been encouraging as Pearson himself had to point out in his own statement too, “While the Allergan CEO and Board of Directors made it clear, both privately and publicly, that they were unwilling to enter discussions with us about creating a value-enhancing combination, we are hopeful that our proposal for this extremely compelling combination will enable us to engage in productive discussions.”

As for Bill Ackman, he also chipped in as follows, saying “The combination of Valeant and Allergan represents the most strategic and value-creating transaction I have ever analyzed, ” Of course he would say that though. Then he added, “I strongly urge the Allergan Board of Directors to carefully examine the proposed transaction and enter into negotiations with Valeant so that a merger can be consummated promptly.”

Ackman continued, “We will be electing all-stock consideration in the transaction so that we can remain a long-term holder of the combined company.” He would say that too, so no surprises there either, in a case of a corporate activist changing roles to become an old fashioned corporate raider just in it for the money. Of course he was never anything else but the public relations imagery is a little more nuanced in this case.

Valeant’s 335 million outstanding shares rose a more modest 6% to US$132 on the new York Stock Exchange. As a bidder’s shares can often slip back a bit post-announcement of a deal, this is quite positive for Valeant. Allergan and Valeant are each companies of quite similarly size, with Allergant valued at US$49 billion in the market and Valeant at over US$44 billion, at today’s prices.

In its own official acknowledgement today of receipt of the hostile takeover proposal, Allergan made no additional comments beyond stating they would study them carefully; no doubt they will spend some time locked up with their lawyers, advisers and consult their major shareholder constituencies first. Let battle commence!

 

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