IRVINE, Calif.—For all that 2014 is not even halfway over, it has already been a busy year in terms of mergers and acquisitions, and few deals have been as large—or fraught—as Montreal, Canada-based Valeant Pharmaceuticals International Inc.’s unsolicited merger proposal for Allergan Inc.
Valeant—supported by investor William Ackman, founder of Pershing Square Capital Management L.P.—announced the merger proposal on April 22, under which each Allergan share would be exchanged for $48.30 in cash and 0.83 shares of Valeant common stock. Under the deal, Allergan shareholders would own 43 percent of the combined company. Pershing Square is Allergan’s largest shareholder, claiming a 9.7 percent stake in the company.
J. Michael Pearson, Valeant’s chairman and CEO, said the offer “represents an undeniable opportunity to create extraordinary value for both Allergan and Valeant shareholders by establishing an unrivaled platform with leading positions in ophthalmology, dermatology, aesthetics, dental and the emerging markets.” Valeant expects more than $2.7 billion in annual operating cost synergies from the merger, with 80 percent of that achieved in the first six months following completion, and 25 percent to 30 percent pro-forma 2014 cash earnings per share accretion.
Valeant noted in April that excluding Ackman’s stake, roughly 56 percent of Allergan shareholders were also shareholders in Valeant.
In response to the proposal, Allergan’s board of directors unanimously adopted a one-year stockholder rights plan effective April 22, and on May 12, unanimously rejected Valeant’s proposal on the grounds that it “substantially undervalues Allergan, creates significant risks and uncertainties for the stockholders of Allergan and is not in the best interests of the company and its stockholders.”
In an investor presentation detailing the company’s hesitancies regarding the merger, “Certain Potential Business Risks and Issues with Valeant Pharmaceuticals International, Inc.,” Allergan said a number of serious concerns regarding the “sustainability of Valeant’s business model” emerged, concerns that included Valeant’s low organic sales growth; sustainability of acquisitions strategy; low R&D investment and the impact on future growth; market share erosion due to lack of sales and marketing infrastructure and investment; lack of transparency in financial reporting and sustainability of tax structure. The document questioned whether Valeant has the necessary experience to promote products on the scale of Allergan’s, noting that “Valeant’s limited experience with large, global-scale products represents a material execution risk attempting to grow Allergan’s categories and launching significant new large products through existing channels.”
Allergan also announced that it had received more than 500 letters from “physician customers, patient advocacy groups and medical associations” from customers supporting its rejection of Valeant’s proposal.
Following Allergan’s rejection, Pearson noted in a letter to Allergan shareholders that Valeant planned to hold a webcast to counter Allergan’s dismissals of the proposal and improve the offer.
“We are prepared to pay a full and fair price, but consistent with our track record, we will remain financially disciplined … We will not stop our pursuit of this combination until we hear directly from Allergan shareholders that you prefer Allergan’s ‘stay-the-course plan’ to a combination with Valeant,” Pearson wrote.
On May 28, Valeant upped the ante by 21 percent to approximately $49.4 billion. The new offer would acquire all outstanding Allergan shares for $58.30 in cash per share and 0.83 Valeant common shares, as well as a contingent value right (CVR) related to DARPin sales of up to $25 per share. Valeant also said it commits to investing up to $400 million in DARPin and retaining current Allergan employees involved in development, which could be an attempt to address some of Allergan’s concerns regarding Valeant’s proposed cuts to R&D and its forecast $2.7 billion in synergies. The same day, Valeant also announced an agreement for the sale of all its rights to Restylane, Perlane, Emervel, Sculptra and Dysport to Nestle S.A. for $1.4 billion. On May 30, Valeant went even higher, offering $72 per share in addition to the previously established stock and CVR rights, with Pershing Square agreeing to forego all cash and accept 100 percent of its consideration in Valeant stock at a 1.22659 exchange ratio. Valeant said the proposal, which now totals approximately $53 billion, is contingent on good faith negotiations.
Allergan responded to both revisions much the same way it did to the original offer, confirming the receipt of the offer and cautioning stockholders not to take any action at this time. Once Allergan receives the “re-revised proposal” from Valeant, the company said that its board “will carefully review and consider it and pursue the course of action that the Board believes is in the best interests of the Company and all of its stockholders. No action by Allergan’s stockholders is required at this time.”
Allergan isn’t alone in its wariness regarding the future of the company in Valeant’s hands. Alex Dumortier of Motley Fool cited Allergan’s SEC presentation, which called Valeant’s roll-up strategy unsustainable, stating that “I’m inclined to agree with that assessment and, as such, I don’t find the new offer compelling enough,” referring to the May 28 revised proposal. A Bloomberg article noted that “Bankers and lawyers advising other healthcare companies have told their clients to take cash instead of stock if any are approached by Valeant,” according to people familiar with the matter. “Because Valeant’s business model and share price are dependent on the drugmaker making acquisitions, it risks running out of steam without more large deals,” those individuals added.
Few question that it would be a strong transaction for Valeant. Stephen D. Simpson of Motley Fool commented that “Allergan is an important asset for Valeant. With its strong position in aesthetics, dermatology and ophthalmology, there are few assets that offer more strategic synergy. Even allowing that regulators would likely force some product divestitures, Valeant would emerge as a stronger player than Johnson & Johnson in the overall aesthetics market, extend its lead in dermatology and fill in the sizable gap in its ophthalmology business created by the lack of glaucoma products … Tying together $7 billion in Allergan sales with nearly $3 billion in cost synergies and the leverage of a much lower tax rate would make this an exceptionally value-additive deal for Valeant.”
This proposal follows two other multibillion-dollar deals for Valeant in the past two years. In 2012, it purchased Medicis Pharmaceuticals Corp. for $2.6 billion and last year, Valeant bought Bausch & Lomb Holdings Inc. for $8.7 billion. In light of the debt burden Valeant took on to finance those deals, and the added $15.5 billion in financing commitments it is expecting for the Allergan deal, some analysts have doubts as to the sustainability of Valeant’s acquisition strategy. In an interview with Bloomberg Businessweek, Vicki Bryan, an analyst at Gimme Credit LLC, said Valeant has to “keep buying at a heavier and heavier and more expensive pace to keep this up. What happens when they can’t? There’s no inherent growth, and the debt side of this is a very big part of the story that the stock market is ignoring.”