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Why Allergan may have to give in to Valeant and Bill Ackman’s US$47-billion bid
Botox-maker Allergan Inc., facing a hostile takeover play from the formidable duo of acquisition-hungry Valeant Pharmaceuticals International Inc. and activist investor Bill Ackman, could still see a Big Pharma white knight step in but the odds are stacked against it, analysts say.

Quebec-based Valeant on Tuesday made a roughly US$47-billion cash and stock bid for the California-based company, with the help of Mr. Ackman’s hedge fund Pershing Square Capital Management, sending Allergan shares up 15.2% in New York to $163.65.

Valeant also saw its shares rise 7.5% in New York to $135.41 Tuesday after revealing its offer of US$48.30 in cash and 0.83 of a share for each share Allergan investors owned — a deal which would mark the biggest takeover in Canadian history, according to Bloomberg data.

With its key product Botox, a nerve-inhibiting injection which minimizes the look and formation of wrinkles, as well as its other dermatological and eyecare products, Allergan is an ideal fit for the acquisitive Valeant and its own product portfolio.

Allergan had already rebuffed Valeant’s previous attempts to buy it, according to a person familiar with the matter.

But Mr. Ackman, an activist investor who helped overhaul CP Rail, joined forces with Valeant in February to create a joint entity to target Allergan. Pershing Square then slowly bought a 9.7% share to become the California-based company’s largest shareholder and support Valeant’s bold takeover bid.

Allergan said in a statement Tuesday it would “carefully review and consider the Proposal” in consultation with its financial and legal advisors and pursue the course of action in the best interest of the company’s stockholders.

Its options include pursuing another buyer which might find Allergan attractive and make an all-cash offer, which would be a better deal for its shareholders, but analysts are doubtful that will materialize.

“It’s a low probability event,” said Alex Arfaei, an analyst with BMO Nesbitt Burns in a phone interview.

Potential bidders include pharmaceutical giants Johnson & Johnson, Pfizer or Merck, but these are remote possibilities, he said.

Valeant’s deal is attractive because of its similar portfolio to Allergan of dermatology and eye-care products, and the infrastructure in these markets that it could leverage in a combined company, he said.

These other large-cap companies, while they have the resources to acquire Allergan, won’t have the same synergies, he said.

David Risinger, Morgan Stanley’s managing director of research, said Allergan’s board could reject Valeant’s bid or seek out a white knight.

“There could be other entities with business interests in eye care or aesthetics that might find Allergan attractive, given its leadership positions, although we have no knowledge of any such interest,” he said in a note to clients. “Also note that Valeant has let other companies outbid it in the past.”

In 2011, Valeant failed to buy drugmaker Cephalon Inc. with a bid of about US$5.7 billion. In early 2012, Valeant attempted to purchase Ista Pharmaceuticals, but it was outbid by global eye-care giant Bausch & Lomb. Last year, Valeant then bought Bausch & Lomb for $9-billion.

Other potential white knights for Allergan include Sanofi, Nestle SA or GlaxoSmithKline Plc, New York-based Sterne Agee analyst Shibani Malhotra told Bloomberg News.

Another way to fend off Valeant and Pershing Square would be to make its own acquisition of a company outside the U.S. with a lower tax rate, Jefferies Group LLC said.

Allergan could also demonstrate to shareholders that the roughly $160 per share offer significantly undervalues the company, but that will be difficult to do given that analysts on average had previously pegged the value at around $135, said Mr. Arfaei.

However, Sterne Agee Group Inc. said the offer is too low because Allergan has appealing growth prospects as a stand-alone entity.

As well, although Valeant investors are likely supporters of the business model, given the likely large component of stock in the purchase price, there may be some reluctance from Allergan shareholders to take on Valeant stock, said Canaccord Genuity analyst Neil Maruoka in a note to clients on Tuesday.

But the overlap in shareholders between Allergan and Valeant is at roughly 50%, not including Pershing Square’s 9.7% share, Valeant chief executive J. Michael Pearson told an investor conference in New York on Tuesday.

Mr. Pearson said Tuesday the combined business would be “very, very healthy, very very robust” with a wide roster of durable products protected from the patent cliff headwind many other pharmaceutical companies face.

The proposed Allergan deal would result in more than US$2.7-billion in annual cost savings, the Laval, Que.-based company said Tuesday.

Still, Mr. Pearson said he won’t tweak their proposal into an all-cash offer so it can “declare victory.”

“That’s not the way we work, and, if someone wants to come in and pay some ridiculous cash price, that’s their choice,” he said. “We’ll just go back to doing what we’re doing and find the next one.”

Valeant itself is the product of a takeover of Canada’s Biovail Corp. by California-based Valeant in 2010. Since the takeover was announced, Valeant’s shares have increased more than seven-fold. Mr. Pearson has been credited with driving Valeant’s share price growth with his unrelenting string of acquisitions.

Mr. Ackman told the investors conference Tuesday Pershing Square would pursue what was best for Allergan’s shareholders. However, he said he expected Allergan’s board would see the long-term benefits of teaming up with Valeant.

Pershing Square had initially approached Valeant with the aim of working together, but it was the pharmaceutical company that suggested targeting Allergan, said a person familiar with the matter.

Mr. Ackman’s hedge fund has agreed to only take stock in the transaction.

“This is the most synergistic combination of any kind I’ve seen as an investor in 20-something years in the business and I want to be a part of it,” he said.
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