(Adds analyst comments, details from filing, paragraphs 6-8, 16-20)
By Svea Herbst-Bayliss, Rod Nickel and Olivia Oran
BOSTON/NEW YORK, April 21 (Reuters) - Activist investor William Ackman has acquired a nearly 10 percent stake in wrinkle-treatment maker Allergan Inc and is working with Valeant Pharmaceuticals International Inc to buy the company, sources said on Monday.
Ackman's Pershing Square, a $13 billion hedge fund, spent roughly $4 billion on acquiring the stake, its biggest-ever investment which comes less than a year after the hedge fund took a stake in Air Products & Chemicals.
Pershing Square began buying stakes in Allergan in February, according to a regulatory filing, with money it had freed up by trimming its stake in Beam and getting out of General Growth Properties, one of its biggest winners ever.
Valeant, a Canadian pharmaceutical company known for skin care products and generic drugs, has been on a buying spree and most recently acquired Bausch & Lomb Holdings.
It has been eager to make a bid for Irvine, California-based Allergan for over a year but has been turned away, a source familiar with the matter said.
In the regulatory filing, Ackman said Valeant will pay with a combination of stock and cash and expects the cash component to total around $15 billion. Barclays and Royal Bank of Canada have said they are ready to help with financing.
A Valeant spokesperson said that a merger with Allergan would create an "unrivaled platform for growth and value creation," and said that the company would soon finalize its proposal and then announce it.
The potential deal also seems to be finding favor with analysts. "The deal also looks attractive because of a "massive amount" of potential operating synergies from the two companies' overlap and Valeant's lower tax rate in Canada, Morningstar analyst David Krempa said.
A spokeswoman for Pershing Square declined to comment.
Traditionally, activist investors like Ackman take a stake in a company and then wait for a catalyst like a takeover to push the share price higher. In this case, Pershing Square is working together with Valeant as a group, according to a regulatory filing, so that Valeant can then push ahead on a takeover.
Hedge fund ValueAct, also known for pursuing activist strategies, sits on the Valeant board but has historically shied away from getting involved in hostile takeovers.
Pershing Square does not shy away from controversy, having waged a very public battle against nutrition and weight loss company Herbalife with a $1 billion short bet unveiled in December 2012. This year, Pershing Square is delivering some of the hedge fund industry's best returns with a gain of roughly 10 percent through the middle of April, a Pershing Square investor said, while the broader Standard & Poor's 500 index is largely flat.
If the companies were to unite, the deal would bring together two mid-sized pharmaceutical companies with expertise in skin care and eye care products.
Allergan, which also has a lucrative portfolio of ophthalmic drugs to treat conditions such as glaucoma and dry eye, reported $6.3 billion in revenue last year and forecast 2014 revenue of $6.65 billion to $6.95 billion.
Valeant, reported $5.8 billion in revenue last year.
There may be some push back from Allergan's board however, Morningstar analyst Michael Waterhouse said, noting that Valeant's reputation of slashing research and development might make some uneasy.
Also Waterhouse said one big downside of a takeover, might be the loss of Allergan's longtime CEO David Pyott, an avid dealmaker who built Botox into a blockbuster by continuously testing it for new uses.
Investors liked the news and sent shares up on Monday, with Allergan rising 6 percent to close at $142 per share. Valeant climbed 3.24 percent to close trading at $126.01.
But one Valeant shareholder thought the deal might be too pricey. Allergan shares closed on Monday up 28 percent so far in 2014, trading at all-time highs.
"It's almost impossible to turn it into a high return investment if you pay that kind of price," said Glenn Greenberg, managing director of Brave Warrior Advisors, a Valeant shareholder. (Additional reporting by Bill Berkrot, Ransdell Pierson; Editing by David Gregorio and Jonathan Oatis)