Valeant's Bid for Allergan: Winners and Losers

Similar to yesterday, U.S. stocks opened little changed on Tuesday, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) up 0.42% and 0.41%, respectively, at 10:15 a.m. EDT. Nevertheless, news that activist investor Bill Ackman has teamed up with Valeant Pharmaceuticals (NYSE: VRX  ) on a cash-and-stock offer for Botox maker Allergan (NYSE: AGN  ) ought to spark investors' animal spirits (as well as trepidation in executive suites -- teaming up with a strategic acquirer is a novel variant of the activist investor's approach.) Couple that with reports that Pfizer conducted preliminary discussions with AstraZeneca regarding a $100 billion takeover. The Financial Times reported that the talks, which took place late last year, have since ended, but that didn't stop investors from bidding up AstraZeneca's shares by nearly 9% yesterday.

Valeant said its offer represents a "substantial premium" over Allergan's undisturbed share price of $116.33 on April 10, the day before Ackman's Pershing Square Capital Management crossed the 5% ownership threshold that requires a public disclosure. Pershing Square is now Allergan's largest shareholder, but it's not the only activist investor in the mix: hedge fund ValueAct Capital is Valeant's third-largest shareholder; its president, G. Mason Morfit, sits on the company's board. (Morfit is a busy man, as you may remember he recently joined Microsoft's board.) The market is certainly validating Valeant's interest -- Allergan's shares were trading up nearly 16% to $164.41 at 10:15 a.m. EDT.

When the dust clears, this looks like a terrific offer from the viewpoint of Allergan's shareholders -- no wonder Ackman is supporting the deal. Even before today's pop, Allergan shares were trading at a rich 26 times next 12 months' earnings-per-share estimate.

But Allergan shareholders' good fortune looks like Valeant investors' burden. The economics are more difficult to square for the acquirer, which is why it's curious that ValueAct Capital, a value investor, appears to support the deal. Indeed, another value-oriented investor that owns Valeant shares isn't impressed with the terms of the deal; as Glenn Greenberg, the managing director of Brave Warrior Advisors, told Reuters: "It's almost impossible to turn it into a high return investment if you pay that kind of price." For now, the market disagrees, shares of Valeant are also up 5.1% this morning.

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