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The Quebec based drug maker Valeant, led by its CEO Mike Pearson, has been on the acquisition trail again a lot lately, recently bidding for California based Allergan, the maker of Botox. Valeant made the bid in conjunction with Bill Ackman’s activist hedge fund Pershing Square, which separately picked up a very useful holding of just under 10% early on, too, raising more than a few eyebrows afterwards as to its propriety.
Valeant’s bid for Allergan, which was a combination of some cash but mostly stock, was roundly rejected by Allergan’s board after a decent interval to study it. Just yesterday, Allergant also went on to the public relations offensive and laid out a 21 page slide presentation of their own, criticising many critical assumptions and details of the Valeant bid for Allergan. This Allergan presentation very aggressively queries the entire Valeant business model as well, coming close even to asserting it may be a house of cards built on debt.
In any acquisition battle the primary battleground, where victory is gained or lost, is the state of the hearts and minds of the institutional investors and mutual funds who collectively often hold large stakes in the target company. To these one must add the opportunistic arbitrageurs, or “Arbs”, on Wall Street who jump in with substantial market purchases once a company is put in play, hoping to play the role of king makers at the end of the game, and to make a quick profit on the turn.
Now today Valeant is endeavouring to pre-emptively answer its critics by upping the ante on the price, adding an additional US$10 per share in cash to tis bid. This raises the value of their total bid, which is a combination of cash and their own shares to around US$166 per Allergan share. This yields a total valuation of a little over US$49 billion therefore, based on yesterday’s closing price for their own stock, i.e. an increase of about eight and a half percent.
Even so the new Valeant bid still only includes about US$17.4 billion in cash with the rest – about US$32 billion – still coming in the form of Valeant shares. This therefore exposes Allergan’s shareholders to hefty levels of debt at Valean post-acquisition. This raises continued concerns for those shareholders who don’t plan to just cash in their chips the day after the merger, and who may well believe in the growth model that Allergan itself is now vigorously proposing for itself.
Id addition, Valeant has tweaked its bid for Allergan in a couple of cute of extra ways. First, it proposed to add a contingent value right on the sales of Allergan’s Darpin eye treatment, worth it said up to US$25 per share, which is still at the trial stage. This could be construed rather cynically, perhaps, simply as a way to pay Allergan shareholders with their own money. Valeant is also selling some of its skin care rights for up to US$1.4 billion, to Nestlé to raise cash and remove conflicts – and indeed Nestlé has been seeking to bulk up their skin care products since the purchase of Galderma from L’Oréal in February.
Nevertheless after trading yesterday at around US$165 per share, today Allergen shares have opened dipping just below US$160, as of the time of writing, rather less than the bid value as of yesterday. This possibly reflects continuing stock market sentiment that even though the Valeant bid itself might be in doubt now, with the company already in play it is nevertheless likely to end up sold to somebody, even if not to Valeant. Meanwhile Valeant’s shares, at around US$125 dropped about three percent so far this morning, also lowering the value of the bid in tandem at the same time.
The aggressive public relations defence by Allergan can not be an accident; the company’s expensive advisers must have concluded that Valeant is vulnerable to attack, and that it is best to hit them hard early on in the game.
As financial consultants and forensic accountants, Allergan has taken on board Alvarez & Marsal and FTI Consulting, who have done their best to dissect all the rosy projections Valeant have delivered on the future of a merged enterprise. They have also had a good go at some of Valeant’s own reporting practices for their many previous acquisitions. It seems post-acquisition accounting practices of such serial acquirers can sometimes leave room for significant management reporting manoeuvres.
Meanwhile investment bankers Goldman, Sachs & Co. and BofA Merrill Lynch are serving as Allergan’s financial advisors covering the capital markets side of the war. Finally top law firm Wachtell, Lipton, Rosen & Katz serve as legal counsel to Allergan, obviously a key appointment in any hostile takeover battle.