The idea of comparing Valeant Pharmaceuticals to Carl Icahn might seem outlandish, but after yesterday’s disclosure this seems to be where things stand: Valeant has effectively become an activist investor.
In the absence of such an unusual move, Valeant doing yet another acquisition would barely qualify as news. But its bid for Allergan will now turn not only on how much more leverage Valeant’s balance sheet can take, but also on how much pressure it can put on the target to agree to an opportunistic deal.
It is thus little wonder that Valeant has had to resort to shareholder activism to try and push the deal through. In launching today’s hostile bid Valeant is stretching itself about as thin as it can.
Matters came to a head yesterday when Valeant disclosed to the US SEC that it had injected $75.65m into PS Fund 1, a joint venture with the hedge fund Pershing Square Capital Management that would acquire stakes in target companies. At the same time it was disclosed that Pershing had amassed a 9.7% interest in Allergan, and that a bid was imminent.
Valeant acquiring is nothing new (Mid-cap consolidation spree looks set to yield bigger deals, February 20, 2014). Buying Allergan also makes sense since the group has underperformed the market – at the end of last week its stock has climbed a measly 40% over two years – and can probably do with being shaken up.
The trouble is that Valeant’s approach does not seem to offer Allergan investors an awful lot: only $14.5bn is in cash, with the remainder being in Valeant stock that at today’s price values Allergan at around $48bn in total.
There has been no response from Allergan, though it seems likely to reject the bid. UBS analysts wrote yesterday that since Allergan had previously traded at a 25-26x multiple of EPS it might look to hold out for a valuation closer to $60bn.
Since over two years Valeant stock has more than doubled, the group's reliance on shares to fund such a high proportion of the proposed takeover can be seen as opportunistic.
At present the group touts over $2.7bn of annual cost savings – higher than the $2.5bn UBS and Leerink had expected – excluding “significant revenue synergies”. 80% of the savings will come within six months and the remainder in the following 12, Valeant says, and thanks to its Ireland domicile the combined entity will enjoy a high single-digit tax rate versus Allergan’s current 27% or so.
Still, Valeant probably realises it has to push hard, hence its highly unusual decision to work directly with a fund as an activist. It will be looking for the 9.7% interest – which makes Pershing Allergan’s biggest investor – to pull other shareholders with it.
Pershing has agreed to receive only Valeant stock in the Allergan deal, and it apparently intends to remain a long-term shareholder of the post-merger Valeant. Presumably such assurances are necessary to make it clear that Pershing is not simply buying a stake to sell on to Valeant at a profit.
So how can Allergan rebuff Valeant, and can Valeant raise its offer? One idea would be for Allergan to buy an Ireland-domiciled company and thus achieve full tax inversion itself; another is to attract a rival bidder.
Valeant says the cash element of its approach is to be met by a $15.5bn debt commitment from Barclays and RBC Capital Markets that carries a 5.5% interest rate. At the end of 2013 Valeant’s debt pile stood at $17.4bn and cost the group $844m a year to service.
Just as well for Valeant that two potential Allergan counterbidders – Novartis and GlaxoSmithKline – will as of today be too busy to enter the fray.