Allergan (NYSE:AGN) can’t escape the advances of major shareholder and activist investor Pershing Capital Management, which this week publicly urged the cosmetic devices maker to further discussions with prospective acquirer Valeant Pharmaceuticals’ (NYSE:VRX, TSE:VRX).
Pershing manager and hedge fund billionaire William Ackman asked Allergan’s leadership to take meetings with Valeant to explore the unsolicited $47 billion offer that Allergan has been dodging for weeks.
"It is evident based on the market’s response to the Valeant proposal that it is substantially superior to Allergan’s value as a standalone company," Ackman wrote. "We believe it is in the best interest of Allergan shareholders that it begin discussions with Valeant in the very near future."
By Ackman’s calculations, Valeant’s offer represents a premium of between 61-78% over Allergan’s share value, a price that he says the company is unlikely to beat. Even if Allergan were to find a better offer, Ackman maintained that the Valeant deal is best for shareholders, and time may be running out.
"Allergan is in a good position to negotiate with Valeant. This may not always be the case," according to the letter. "The strength of Allergan’s negotiating position comes, in part, from the potential that the board may negotiate a more valuable transaction with a large global pharmaceutical company. The list of global pharmaceutical companies with the financial capacity to buy Allergan, however, is limited, and even more limited when factors such as strategic fit and antitrust risk are considered."
If Allergan goes shopping for other suitors, news of their disinterest will gradually erode the company’s leverage with Valeant, Ackman added. Valeant has suggested that it’s willing to negotiate a bigger deal, but has also said publicly that it’ll reduce its offer if it finds other prospective buyers dropping out of the running.
"We believe the board should begin negotiations with Valeant immediately," Ackman wrote. "The decision to negotiate now is not a decision to sell the company and, therefore, would not prejudice the exercise of the board’s fiduciary duties."
Pershing further warned Allergan to stay away from risky transactions that may dwindle Valeant’s interest. Word on The Street is that Allergan has explored options to acquire a foreign company and shift its headquarters in efforts to reap the rewards of a lower-tax jurisdiction. Valeant’s offer would beat any shareholder benefits that Allergan could cultivate that way, Ackman wrote.
"As Allergan’s largest shareholder, we are supportive of Allergan making the best possible deal with Valeant or identifying a superior transaction with another company," he concluded. "Given the short list of potential acquirers and Valeant’s willingness to negotiate quickly, we believe Allergan can explore its strategic alternatives and determine a course of action within a matter of weeks."
Pershing just recently became a major Allergan shareholder, buying up 9.7% of the company’s shares shortly before announcing a joint acquisition offer with Valeant. The companies made a public offer of $48.30 in cash and 0.83 shares of Valeant common stock for each Allergan share, saying that their direct-to-shareholder acquisition bid came after a year-and-a-half of failed attempts to negotiate with Allergan leadership.
Allergan responded by adopting a "poison pill" strategy, under which stakeholders other than a prospective acquirer may buy additional shares at a discounted price, potentially deterring would-be bidders by increasing costs.
Another major shareholder, Polen Capital Management, warned late last month that Allergan can do better than Valeant’s offer, urging fellow shareholders not to sell out.
"We think we could get this type of price just from another couple of years of compound earnings growth,"Polen chief investment officer Dan Davidowitz told the Wall Street Journal. "I don’t think this is that attractive of an offer."
AGN shares closed last night at $169, down 0.5% on the day. The stock has jumped more than 36% over the last month and is up 52% since the start of the year.