Valeant and Pershing Square back third Allergan bid with threats

Valeant’s new $179-per-share offer for Allergan may not be the final twist in the hostile saga, but hedge fund Pershing Square would surely only have made its decision to forgo the $72-per-share cash portion of the bid in favour of stock if it were certain that the deal is all but done.

Pershing Square, led by activist investor Bill Ackman, has a 9.7% stake in Allergan and will lose out on around $600m in total – $20.75 per share – if the deal goes through. But it will suffer far heavier losses if Allergan again rejects the bid. It is thus backing up its carrot with a heavy, spiked stick: it has started a process that could end with the defenestration of Allergan’s board.

Gloves off

On a conference call today, Mr Ackman said that his company and Valeant were moving to obtain the 25% Allergan shareholder vote needed to call a special meeting. Expected between August and November, this meeting would see a shareholder vote to remove the Allergan directors. “We intend to propose removing the majority of the board and replacing these directors with new candidates,” Mr Ackman said.

If Allergan’s board refuses to appoint these new directors, a summary election can be sought if 10% of shareholders vote in favour, the companies say.

Mr Ackman said that he had met with six of the 10 largest shareholders in Allergan, which along with Pershing itself – the single largest investor – represented a 26% stake in total. All were in favour of the buy, he said, and were looking for a price of around $180 per share. This is the minimum figure suggested by analysts last week (Valeant is unlikely to have long term vision for Allergan’s eye assets, May 29, 2014).

Another 25% of Allergan’s stock is held by hedge funds and risk arbitrage groups; Mr Ackman claims that these are also throwing their weight behind the transaction.

The companies insist that it is only Allergan’s management that opposes the buyout, with most of its lower-level employees and a majority of its investors firmly in the pro-Valeant camp.

Good cop, bad cop

Pershing Square’s decision to go without the cash increases the cash available to other shareholders by $6.65 per share. The hedge fund took this option because it believes the move will accelerate the transaction, Mr Ackman said, but also because it is betting on the future of the company: they make $600m less today, but much more in time.

The next move is Allergan’s. Though no specific time limits have been set, the current offer is contingent on Allergan’s board opening discussions rapidly. Valeant says that if Allergan comes round, a merger agreement could be signed within a week.

Mr Ackman, ever the bad cop, backed this with a warning. Allergan is in the best position to negotiate now, he said. Once Valeant and Pershing Square start to round up shareholders, Allergan’s board will have less influence.

In other words, if Allergan’s directors wish to keep their heads, they had better make common cause with the revolutionaries.

To contact the writer of this story email Elizabeth Cairns in London at elizabethc@epvantage.com or follow @LizEPVantage on Twitter

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