October 8, 2014 / 8:54 PM / 4 years ago

DEALTALK-Actavis may reap benefits of Valeant's hard work on Allergan

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By Soyoung Kim and Nadia Damouni

NEW YORK, Oct 8 (Reuters) - Earlier this week, Canada’s Valeant Pharmaceuticals International Inc appeared to have its plan to buy Botox maker Allergan Inc all mapped out.

The next phase in Valeant’s months-long campaign to acquire Allergan for about $53 billion in cash and stock was to announce “blow-out” earnings on Oct. 20, which would have led to a jump in its share price and, therefore, the value of its bid, according to people familiar with the situation.

Valeant would have sweetened its offer even further, potentially bringing it somewhere between $195 per share and $200 per share from $175.94 per share as of Tuesday’s closing price, these people said.

The bump would have put further pressure on Allergan ahead of its Dec. 18 shareholders meeting at which some of its board members might be voted off, under a campaign led by hedge fund manager Bill Ackman, Valeant’s partner in the attempted takeover. Valeant, Ackman and many investors had expected Allergan to lose the vote.

However, Valeant’s well-laid plans appeared to run into trouble this week, when rival drugmaker Actavis Plc came back into the picture as a possible white knight for Allergan.

After months of insisting that it was better off staying independent or being the acquirer, Allergan, led by Chief Executive David Pyott, was warming up to the idea of considering an offer that values the Botox maker at above $200 per share or more than $60 billion - only not from Valeant, people familiar with the situation told Reuters on Tuesday.

Meanwhile, a separate person said Actavis, which in recent months held informal conversations about a potential combination, would now like to take a hard look at buying Allergan and could reach out to the company as soon as this week to reiterate interest. Until recently, Allergan had indicated to Actavis that it wanted to stay independent, the source said.

Allergan, Actavis and Valeant declined to comment. Representatives for Ackman could not be reached for comment.

There is no assurance that Actavis will come up with a proposal high enough for Allergan to find attractive. Allergan will not consider a bid unless it sufficiently exceeds $200 per share, the sources said.


Still, the latest developments throw the question of Allergan’s future wide open, just when Valeant was beginning to gain some traction on its bid, originally made in April.

Last month, Valeant CEO Michael Pearson boosted his case for a deal by saying the Canadian drugmaker expects third-quarter revenue to beat analyst expectations and adjusted earnings per share to surpass the company’s forecast.

Some Allergan shareholders had also begun to express concerns that the Botox maker may go out and buy a large company without seeking shareholder approval in order to make it too expensive for Valeant to buy it. Allergan held on-and-off discussions with Salix Pharmaceuticals Ltd about buying the drugmaker for more than $10 billion in cash, a deal that would not have required a shareholder vote, Reuters previously reported.

Earlier this month, influential proxy advisory firm ISS called on Allergan to give its shareholders a chance to vote on any large, buyout-blocking acquisitions and said the company’s board faced a credibility problem.

The latest twist in the saga also highlights the risks companies take when they enter into no-holds-barred, hostile takeover battles. One of the sources likened the situation to Comcast Corp’s $45.2 billion deal to buy Time Warner Cable Inc earlier this year. In that case, a months-long pursuit by the initial instigator, Charter Communications Inc , had the effect of putting Time Warner Cable in play and creating the perfect opportunity for Comcast to swoop in.

People familiar with the matter said that Valeant was worried about exactly such a situation.

While it does not expect large pharmaceutical companies such as Johnson & Johnson or Sanofi SA to jump in to the fray, the Canadian drugmaker has considered Actavis as a dark horse, these people said.

Valeant, which along with Ackman has spent nearly six months and millions of dollars in advisory fees on the pursuit, saw its shares fall 2.5 percent on Tuesday, after news of Actavis’ continued interest broke.


To be sure, sources on all sides of the battle said the field is still wide open. The bidding war is pushing up Allergan’s shares to ever-lofty valuations.

Valeant’s math shows that at $200 per share, the deal will be dilutive for Actavis in the first year and could add a huge debt burden on the company, one source said.

But some analysts said a deal could still work. At $210 per share, JPMorgan Chase analysts expect the deal would lead to a modest, mid-single-digit earnings per share accretion initially. Furthermore, it will expand Actavis’ trading multiple “significantly” because it currently trades at 13 times 2016 forecast earnings, a discount to 19 times for Allergan.

“We see significant upside for the stock at current levels,” JPMorgan’s Chris Schott said in a research note on Tuesday.

Actavis thinks at $200 per share, Allergan gets expensive, but not prohibitively so, one source said. To make it work, Actavis would need to look for more synergies, something that it can do only once it is given access to Allergan’s books, the source said.

Actavis, which regularly reviews potential acquisitions, considers Allergan the best merger partner currently and is hoping to engage in friendly discussions, the sources said.

For Allergan investors, meanwhile, a bidding war is proving to be good news. Allergan’s shares closed 2.3 percent higher at $190.50 on Wednesday, after hitting a new high.

“The decision by Allergan to oppose the Valeant offer looks increasingly like the right choice,” BernsteinResearch analysts said in a research note on Wednesday. “Allergan has created sufficient value to drive up the price of the offer from Valeant; it may have attracted an additional bidder - Actavis - into the mix.” (Editing by Paritosh Bansal and Matthew Lewis)

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