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Last week pharmaceuticals company Allergan Inc, the Irvine California based maker of Botox received a second, increased, takeover offer from Quebec based Valeant Pharmaceuticals. The Valeant bid is being made jointly with Bill Ackman’s Pershing Square activist hedge fund. Bill Ackman had also accumulated just under 10% of Allergan before the bid was announced.
Worth about US$54 billion when it was made last week, the Valeant offer, which was part cash and part stock is worth just under US$53 billion, today, based on a slight fall in Valeant’s shares since then.
Whilst Allergan quite properly took some time to study the new bid, after consulting with their independent financial and legal advisors today they have come out and, again, firmly rejected it just as they had the first one.
Allergan’s CEO David Pyott has written a letter to Michael Pearson the CEO of Valeant’s CEO in which he states the latest cash-and-stock offer “substantially undervalues” Allergan and “creates significant risks and uncertainties” for its shareholders.
Adding insult to injury, David Pyott believes that Valeant’s newest proposal, which is for $72 in cash and 0.83 of a Valeant share, for each of the $298.3 million outstanding shares of Allergan isn’t even worth taking further about. Accordingly he states in the letter, “In addition, we do not believe your latest proposal offers sufficient or certain value to warrant discussions between Allergan and Valeant.”
In order to reach its conclusions Allergan’s board considered what it believed to be Allergan’s strong prospects as a stand-alone company, its research and development success and what it said was Valeant’s “unsustainable business model” and “anemic growth.” The second part of that argument is extremely important as, while the total offer currently is for about US$176.58 per Allergan share, only 40% of the Valeant proposal is for cash. Accordingly, investors really do need to understand what they would be getting into if they should go along for the ride with Valeant for the longer term, after any such acquisition.
David Pyott also pointed out in his letter, “Allergan has a track record of generating consistently robust results and value for its stockholders, and we continue to have strong momentum in our business. The investment community has recognized the revised long-term growth outlook Allergan provided on May 12, 2014 and appropriately raised valuations for a standalone Allergan. We do not believe Valeant’s proposal reflects Allergan’s growth prospects, nor does it offer sufficient or certain value to warrant discussions between Allergan and Valeant.”
“The Board is confident that the Company will create significantly more value for stockholders than Valeant’s proposal. We look forward to updating stockholders on or around the time of our second quarter earnings announcement.”
To support its arguments, Allergan has also released a second presentation to investors illustrating again what it says are its own strengths and Valeant’s weaknesses.After peaking last week at over US$172 per share, today Allergan’s stock has settled back to under US$165 indicating the market may not be betting on this takeover succeeding, or at least not at the present price or even, necessarily, to the current bidder.
This is all strong stuff, and indicates a confident Chief Executive, one who believes in his business and who has a sense of the support he will need from his shareholder constituencies. Last week, also, Allergan alerted its shareholders to an attempt by Bill Ackman to call a special meeting of shareholders for the purpose of voting out its current board in favour of an Ackman slate.
Since the best defence is often offence David Pyott now attacks the Valeant business model head on both in his letter, and in the new presentation prepared for Allergan investors – which is particularly up-beat and aggressive. In the latest letter to Valeant he states bluntly:
The (Allergan) Board also considered how the second revised proposal creates significant risks and uncertainties for Allergan stockholders due to, among other things:
• Valeant’s unsustainable business model relies on serial acquisitions and cost reductions, as opposed to top-line revenue growth and operational excellence;
• A lack of clarity surrounding Valeant’s growth potential because of Valeant’s opaque pro-forma driven financial reporting, which provides, among other things, limited insight into how past acquisitions and products are performing;
• Valeant’s anemic growth, which Allergan believes is primarily driven by significant price increases; and
• Valeant’s unrealistic SG&A and R&D synergy targets, which Allergan is confident would destroy Allergan’s long-term value.
It is possible therefore that Allergan may have succeeded in changing the subject of the conversation, something which is very difficult to do, from itself as a target to Valeant as an entity with an aggressor covering up a fundamentally poor business model, one which investors should be wary of.
If so Allergan could very well now move from a position of weakness to one of strength and retain their independence, leaving Valeant to fend for itself with some potentially angry investors now they have been alerted and focused on the subject of Valeant’s own independent prospects.
Such an outcome would also leave Bill Ackman whistling in the wind too, though he has a thick skin and would simply shrug his shoulders and move on. Since his stock of Allergan is still trading likely well above the prices he paid for it he won’t even suffer much, if at all, if it falls out of bed for him.
On the other hand Valeant may come back, again, with a third offer, so let’s wait and see; it ain’t over till it’s over.
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