Published On: Mon, Jul 21st, 2014

Allergan Cutting Workforce, Fighting Bill Ackman, Valeant, in $51 Billion Takeover Battle

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 If a meeting is called, Ackman and Pearson would be expected to try to utilize it to vote in a new slate of directors.

 

Read More: Allergan CEO To Ackman: “All I Care About Is Creating Value For Allergan’s Shareholders”

The war of words between Quebec based Valeant Pharmaceuticals Laval and California headquartered, Botox maker Allergan is fast and furious, as Valeant continues its unrequited suit for the latter company.

Meanwhile, Allergen today announced solid financial results for its second quarter to June 30th, 2014, and unleashed a major round of cost-cutting, with a 13% planned cut to its work force which, it says, together with other measures, will save it some $475 million in 2015 alone.

Allergan also issued a new corporate presentation for investors today, containing aggressive strategic forecasts for growth in earnings in the coming fiscal years, which might well impress some investors still sitting on the fence.

Just over one month ago,  Valeant Pharmaceuticals, in partnership with Bill Ackman and his Pershing Square activist hedge fund, went hostile in their joint endeavour to acquire speciality pharmaceuticals company Allergan, the maker of Botox, with a bid valued at around $51 billion.

Pershing Square had earlier picked up its own holding of just under 10% of Allergen, which, when it was announced, led Allergan to implement a standard-edition shareholders rights plan, a.k.a. a poison pill, with the goal of either defeating the bid, or of slowing it down to give itself time to develop alternative responses, including, possibly, obtaining a better price.

Three weeks ago, lawyers on both sides agreed that the ambiguous language of Allergan’s defensive shareholder rights plan would not prevent Ackman and Valeant CEO Mike Pearson from making a proxy solicitation to call for a special shareholders meeting. Under the company’s Articles of Association, only 25% of shareholders votes are required for holding such a meeting.

If a meeting is called, Ackman and Pearson would be expected to try to utilize it to vote in a new slate of directors, one they hope would consider their takeover proposal more favourably than the existing board, which has so far rejected it outright as inadequate. Of course, any new slate, even if voted in, could not be just a rubber stamp for the Valeant and Ackman interests – as it would inherit the same fiduciary duties to fairly appraise their bid as does the existing board.

Accordingly, the best tactic Ackman and Pearson might hope for, if a meeting is held and a new board inducted, is that the persuasiveness of their arguments could be reinforced by raising their bid, thereby making acceptance easier.

In the meantime, Allergan has seriously critiqued some of Valeant’s financial reporting, its business model and some of its prospects, prompting an outraged Valeant to complain to the SEC about it.

Bill Ackman has continued to wage a propaganda battle from the sidelines, saying if the merger isn’t done by the end of the year, Allergan shareholders would be left with nothing.

Then Allergan today issued its latest quarterly earning report, but also took the bull firmly by the horns, announcing it will cut 1, 500 jobs, or almost 13% of its work force, as a cost cutting response to the demands of shareholder activism. With this and other changes, it expects to save about $475 million annually in calendar 2015 alone.

The impact on Allergan’s strategic plan will be significant, and the company now expects to deliver earnings-per-share growing at a compound annual rate of more than 20 percent between the fiscal years 2014 and 2019. For 2014, Allergan is now projecting EPS of between $5.74 and $5.80, growing substantially in 2015 to EPS of between $8.20 and $8.40. In contrast, Allergan was previously giving guidance for its 2014 profit in the range of $5.64 and $5.73 per share.

For its fiscal second quarter to June 30th 2014, Allergan reported today net income of $418 million on $1.86 billion of net revenues. The company reported $1.37 diluted earnings per share attributable to stockholders, compared to $1.17 diluted earnings per share attributable to stockholders for the second quarter of 2013. Allergan also reported $1.51 non-GAAP diluted earnings per share attributable to stockholders compared to $1.22 non-GAAP diluted earnings per share attributable to stockholders for the second quarter of 2013, a 23.8 percent increase.

The consensus estimate of financial analysts for the company was for EPS of around $1.44. Accordingly, financial markets have been modestly surprised, and the company’s aggressive, new forecasts may sit favourably with some of their important shareholders as well.

An increasingly confident Allergen CEO David Pyott may begin to think he can ride this one out. In any case, when the time bought by the delaying tactics work themselves out, there should be at least a couple of fiscal quarters reported, and if Allergen delivers the goods in terms of results, he may even win the argument.

It is an unusual bid to follow, as, even though Bill Ackman is a card carrying heavyweight in the industry, Valeant itself, which has been a serial acquirer using leverage, may seem to evoke enough doubt in the minds of some investors to at least give Allergen a chance.

Otherwise, it might have been game over already. At the very least, this could cost Ackman and Valeant some more money, in terms of a higher price, before it gets done.

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