Valeant will have to boost Allergan bid even higher than indicated: analysts

MONTREAL – Quebec-based Valeant Pharmaceuticals announced Monday that it is prepared to raise is hostile takeover bid for Allergan Inc. to at least US$200 per share, but neither the California-based Botox maker nor analysts appeared impressed by new the offer, now valued at more than US$60 billion.

Valeant (TSX:NYSE:VRX) did not spell out what combination of cash and stock it would offer, but in a letter to Allergan (NYSE:AGN) it suggested part of the increase would be due to a higher valuation for its own shares.

The higher offer would its fourth since April. The company’s latest bid on May 30 equalled US$72 in cash plus 0.83 of a Valeant share — about US$180 based on Monday’s stock price. Allergan has repeatedly rejected each bid as insufficient.

“To be clear, Valeant is prepared to improve its offer and provide value to your shareholders of at least $200 a share,” Valeant chairman and CEO Michael Pearson said in the letter to Allergan’s board.

He said Valeant’s recent strong quarterly results “fully validated our business model” from Allergan’s “baseless attacks.”

“No other potential acquirer of Allergan has the operational and tax synergies that we have and no other potential acquirer of Allergan can provide the value that we can,” Pearson added.

Allergan said the Valeant letter was an attempt to distract investors from its own “outstanding” results.

“Today all we saw really was an offer to negotiate,” CEO David Pyott said in a conference call to Allergan analysts.

He said the company will present its shareholders a clear choice before a Dec. 18 meeting when they will vote on request by Valeant partner Pershing Square Capital Management to remove a majority of Allergan’s board of directors.

Among Allergan’s options are a strategic acquisition, the repurchase of its own shares, a special dividend and a white knight alternative to Valeant.

Pyott said any transaction reached by Allergan would be announced in early December to give shareholders time “to assess how they gauge the value of that particular option.”

Alternatively, he added shareholders have indicated their second preference is a stock repurchase.

“So I just want to make sure, in the full balance, that all of those options are on the table and are in the public view of all stockholders.”

Analysts said an improved Valeant offer of US$200 per share would be insufficient.

David Maris of BMO Capital Markets said Valeant’s promised adjustment appears based on a promise of a future stock price increase.

“Given previous media reports that Valeant and Pershing planned to raise the Allergan bid by $15, this less than an actual new offer is not surprising, nor compelling,” he wrote in a report.

Analyst Shibani Malhotra of Sterne Agee said she doubts Allergan or investors would view Valeant’s US$200 per share offer adequate given the U.S. company’s improved earnings and merger options.

Liav Abraham of Citigroup said Allergan’s defensive alternatives are limited but will likely receive an alternate bid from Actavis Inc. (NYSE:ACT).

Valeant stock closed up $1.63 to C$146.84 Monday on the Toronto Stock Exchange, and up $1.43 to US$130.56 on the New York Stock Exchange. Allergan’s shares were down $1.88 to US$182.33 on the NYSE.

Allergan beat earnings expectations Monday, reporting net income of US$312.5 million $1.03 per share for the quarter ended Sept. 30. Adjusted for one-time gains and costs, the company earned $1.78 per share, up from $1.23 a year ago, on US$1.82 billion of revenues. Analysts had expected adjusted earnings of US$1.68 per share and US$1.78 billion of revenues, according to Thomson Reuters.

The company raised its full-year sales and earnings guidance, saying its adjusted EPS will increase by up to 32 per cent on up to US$7.1 billion of revenues.

The back and forth between the two pharmaceutical rivals came a day before they are due to appear in a California court to address an Allergan lawsuit that attempts to prevent its largest shareholder, Pershing Capital, from being able to vote at the December meeting over alleged securities irregularities.

Pershing Capital founder Bill Ackman described the accusations as “baseless.”

Valeant, based in Laval near Montreal, said in Monday’s letter that its own share price has been trading at “artificially low” values and accuses Allergan’s management of “baseless attacks and frivolous litigation.”

Meanwhile, Allergan dismissed Pershing Square Capital’s claim that it had uncovered evidence that the California-based company engaged in a “scorched earth” campaign orchestrated by its CEO to thwart the Canadian company’s hostile takeover.

In a legal response, it said the “outlandish personal attack” against the company and Pyott are “entirely unsupported by the evidence.”

“These allegations have little to do with the legal issues in the case and much to do with the defendants’ public relations strategy,” said 26-page filing.

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