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Why Ackman teamed up with Valeant to bid for Allergan

Smita Nair

Overview: Pershing Square's new positions and disposals in 1Q14 (Part 5 of 7)

(Continued from Part 4)

Bill Ackman’s Pershing Square took new stakes in Platform Specialty Products (PAH), Apartment Investment & Management Company (AIV), Allergan Inc. (AGN), and Home Properties Inc. (HME). Positions sold include General Growth Properties (GGP) and Procter & Gamble Co (PG).

Pershing Square disclosed a new position in Allergan Inc. (AGN) that accounts for 0.88% of Pershing Square’s $8.3 billion 1Q14 portfolio.

Activist investor Bill Ackman has been in the news recently for teaming up Canadian drugmaker Valeant Pharmaceuticals (VRX) in a $45.7 billion bid for Botox maker Allergan. In the deal, each Allergan share would be exchanged for $48.30 in cash and 0.83 shares of Valeant common stock. Valeant and Pershing Square believe that the combination of the two companies is “extremely compelling” for both Allergan and Valeant shareholders and will create an unrivaled platform for growth and value creation in healthcare. The management noted that the combination will establish “an unrivaled platform with leading positions in ophthalmology, dermatology, aesthetics, dental, and the emerging markets.”

Regulatory filings revealed that Pershing Square amassed a 9.7% stake in Allergan from February to April valued at about $4 billion. Pershing’s presentation on the bid revealed that “During the six trading days (April 11 to April 21), Pershing Square acquired 14 mm deep in the money Allergan call options and Allergan forward contracts representing 4.7% of Allergan shares outstanding.” News reports noted that Ackman has gained 38% or $1 billion in paper profits on Allergan’s shares.

In response, Allergan adopted a poison pill plan. It rejected the April 22 takeover proposal from Valeant noting that the proposal substantially undervalued the company. It added that Valeant’s proposal created significant risks and uncertainties for Allergan’s stockholders. It believed that Valeant’s business model was not sustainable. Allergan also announced that, given the strength in its business, the company expects to increase earnings per share by 20–25% and continue to generate double digit revenue growth in 2015. Additionally, the company expects to produce double digit sales growth and produce earnings per share compounded annual growth of 20% over the next five years. News reports have speculated that Allergan is talking to Sanofi S.A. and Johnson & Johnson (J&J) for rival bids, and that it is looking to acquire Shire PLC to fend off the Valeant bid. Allergan’s shares are up 13% since the bid was announced.

Valeant responded to Allergan shareholders last week in a letter, announcing its intention to raise its offer for Allergan. Valeant added that it will provide further details in a May 28 webcast.

Pershing Square, Allergan’s largest shareholder, has called for a non-binding referendum among Allergan shareholders to provide support for the company to engage in a meaningful dialogue with Valeant Pharmaceuticals International Inc. Allergan slammed this move stating that the planned referendum is “a self-serving exercise” in which Pershing Square and Valeant are “dictating their own process.”

In a letter to Allergan on May 5, filed with the SEC, Pershing Square cited J.P. Morgan’s April 28th equity research report and said that “using J.P. Morgan’s forecast of the per-share value of the combined company. J.P. Morgan assumes that the combined company would trade at 14 times J.P. Morgan’s estimate of 2016 cash EPS, which implies that the combined company is worth $192 per share, and that the Valeant transaction proposal is worth $208 per share. This value, $208 per share, is a 78% premium to Allergan’s $116 unaffected stock price, and a 61% premium to the average analyst price target on April 10th.” The letter added that Pershing was skeptical of Allergan seeking a “tax-inversion” deal and will oppose a “transaction with another company which did not offer superior shareholder value to the Valeant transaction.”

Continue to Part 6

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