Valeant Launches Hostile Bid for Allergan


Valeant Pharmaceuticals International, Inc. (VRX) announced that it has commenced an exchange offer for the common stock of Allergan, Inc. (AGN).

As per the terms of the offer, shareholders of Allergan can exchange each of their shares for $72.00 in cash and 0.83 shares of Valeant common stock. Allergan shareholders can also opt for cash and a number of Valeant shares, subject to proration.

We note that the tender offer will expire on Aug 15, 2014. Once the exchange offer expires, Valeant expects to complete a second-step merger to acquire the remaining Allergan shares.

In addition, Valeant indicated that it is keen to provide Allergan shareholders with a contingent value right related to DARPin sales if the latter engages in negotiations to work out the exact terms

Meanwhile, Allergan will now review and evaluate the tender offer and has urged its shareholders not to take any action before the Board reviews the exchange offer.

The hostile bid from Valeant does not surprise us. Valeant has been relentlessly pursuing Allergan since Apr 2014. Earlier in the month, Allergan announced that its Board of Directors has unanimously rejected the revised acquisition offer by Valeant Pharmaceuticals International, Inc.

On May 30, 2014, Valeant proposed a revised offer to Allergan whereby each Allergan share would be exchanged for $72.00 in cash and 0.83 shares of Valeant common stock. Valeant offered a contingent value right of up to $25.00 per share for Allergan's ophthalmology pipeline candidate, DARPin. The candidate is currently in phase II.

This was the second time that Valeant had upped its offer. We note that Allergan's largest shareholder, Pershing Square Capital Management, L.P, with a 9.7% stake in the company, had agreed to elect only stock consideration in the transaction and exchange their Allergan shares for Valeant shares at a 1.22659 exchange ratio (based on closing share price on May 29).

Valeant had proposed in Apr 2014 that each Allergan share would be exchanged for $48.30 in cash and 0.83 shares of Valeant's common stock. Thereafter, the company upped its offer by 21% wherein the cash consideration of the offer was increased by $10.00 per share to $58.30.

However, Allergan cited that the revised offer substantially undervalues the company, creates significant risks and uncertainties for the stockholders of Allergan, and is not in the best interests of the company and its shareholders.

Valeant currently has a Rank #3 (Hold) while Allergan carries a Zacks Rank #1 (Strong Buy). Valeant has been quite active on the acquisition front in the last couple of years. Valeant is a specialty pharmaceutical company, primarily focusing on dermatology, neurology and ophthalmology, among others. The company acquired Bausch+Lomb in 2013.

We expect investor focus to remain on further updates from the tender offer.

Some better-ranked stocks in the healthcare sector include Gilead Sciences (GILD) and Alexion Pharmaceuticals (ALXN). While Gilead Sciences carries a Zacks Rank #1, Alexion Pharma has a Zacks Rank #2 (Buy).

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