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Inside Valeant Pharmaceuticals' Bid for Allergan

Earlier this week, Valeant Pharmaceutical (NYSE: VRX  ) made a public offer to buy rival Allergan (NYSE: AGN.DL  ) . Let's review the major questions this huge potential deal raises, to see whether it's a smart move – and whether or not it'll actually happen.

What is Allergan?
Allergan sells specialty pharmaceuticals and medical devices, with businesses spanning eye care, dermatology and aesthetics. It's best-known for its Botox franchise, but its largest business segment is eye health, with treatments for dry eyes, glaucoma, inflammation, allergies, and retinal diseases.

In 2013, Allergan's sales grew 11%;  the company generated 31% operating margins ; 38%  of sales came from outside the United States; and it spent $1 billion (more than 15% of sales ) on research and development.

Why does Valeant want to buy it?
Valeant and Allergan are focused on similar therapeutic areas: eye care and dermatology. Together, the combined companies would be the second-largest  global player in eye health, with a cheaper, more effective combined sales force to boot.

According to Valeant's estimates, Allergan gets 60%  of its revenue from durable products – those that don't rely on patent protections to generate sales – and 65% from products with limited reimbursement risk from government-run health-care programs. Obviously, these types of products are attractive because they'll generate sales over a long period. Governments spend a lot on health care, but they aren't the best customers. They have a tendency to demand huge discounts, pay late, and introduce numerous bureaucratic hassles.

Furthermore, Valeant believes that it can trim a lot of fat from Allergan's cost structure, achieving $2.7 billion in cost synergies by cutting $1.8 billion in overhead costs and $900 million in research and development costs from the combined companies.

How much did Valeant offer?
Valeant is offering $48.30 in cash and 0.83 shares of Valeant for each outstanding share of Allergan. Based on Allergan's diluted share count of 307 million , the deal is worth approximately $49 billion. To finance the cash portion of the deal, Valeant has secured $15.5 billion in debt financing, which is expected to have an interest rate of 5.5%.  

Is it a good deal for Valeant shareholders?
On paper, this looks like a great deal. If the combined company achieves its targeted synergies, shareholders will benefit as the company's per-share cash earning power rises between 25% and 30%.  In other words, the benefit of folding Allergan's business into Valeant will more than offset any dilution for current shareholders. The deal will also shore up Valeant's balance sheet and reduce leverage.

Valeant CEO J. Michael Pearson has an outstanding track record of making smart purchases and delivering target synergies. But Valeant has never done a deal of this size ever before. Inevitably, there will be hiccups, and only time will tell whether Pearson's making a wise move here.

Will the deal go through?
Prior to making this offer, Valeant hired two law firms for advice -- Skadden, Arps, Slate, Meagher & Flom LLP, and Osler, Hoskin & Harcourt LLP . If these lawyers aren't the best in the world, they're at least among the most prestigious and expensive. Since both firms concluded that there shouldn't be any antitrust concerns, I suspect regulators will approve the deal.

Will shareholders also say yes? I think they likely will. Allergan insiders, who have the greatest incentive to reject the deal, only own 0.18% of shares. By contrast, Allergan's largest shareholder, the Bill Ackman-led Pershing Square, vocally favors the deal. Ackman is so enthused by the deal (and Valeant) that he has agreed to accept 100% stock for his ownership stake. 

Of course, I do expect some saber-rattling by Allergan's board of directors. They'll hire an investment bank to look for competing offers, but I don't think any better ones will come. Allergan's board could make a perfunctory effort to haggle with Valeant for a better price, but in the end, I think this deal will get done at or near Valeant's initial offer price.

Foolish bottom line
The price Valeant would pay looks reasonable in light of potential synergies, and shareholders should benefit. But integrating the two companies could prove challenging over the next several years, and investors in either company should keep a careful eye out for any signs of trouble.

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  • Report this Comment On April 27, 2014, at 7:46 PM, BobaCarlson wrote:

    Disappointed in our government/regulation- Valeant bad for our country.

    Allergan, an American company founded in 1948, is consistently profitable, is well managed, continually provides consumers innovative new drugs and therapies that customers want, and provides Americans jobs and our government tax revenues. Valeant, a foreign company, was founded in 1960 and is not profitable. Let me repeat that, they have been around for 54 years and they LOSE money. Their strategy is to take over American pharmaceutical companies, against their will, immediately fire all of their R&D/scientists etc. and destroy their pipeline, and then move on to the next one all while what would be tax revenues are sheltered over seas. Those highly skilled laborers now don't have jobs, and because of Valeant, will have much less of a chance of finding another job that utilizes their expertise because Valeant continues to rape and pillage our companies. The government loses the tax revenues, American families continually lose high-skilled jobs that feed their families, the world loses that innovation/R&D that provides valuable and highly sought after drugs/treatments because that human capital is lost/R&D eliminated.

    Additionally, there are significant antitrust issues. Valeant and Allergan have way too many overlapping products for this acquisition to be fair for consumers. Some of their competing products are: Botox and Dysport neurotoxins (J&J just gave up working on what could have been a competing product); Restalyne/Perlane and Juvederm/Voluma dermal fillers; SkinMedica and Obagi cosmoceuticals, and all sorts of eye care. If Valeant were to succeed they would control the market and could charge whatever they choose to consumers. Consumers would have less choice and no competition. And Valeant wouldn't further expand the uses those drugs already in market could have in other applications like Allergan would/is currently doing.

    Allergan will, and has every right to, decline Valeant's unsolicited offer. The offer is predominately based on Valeant stock, a company that is another house of cards. Bill Ackman evilly implies he has other tricks up his sleeve if Allergan resists. He certainly had lots of tricks up his sleeve to attempt to 'legally' (insider trading) pull this scheme off in the first place while making $$$$$$$ regardless if it goes through. Because our economy is not in the false hyper growth economy created by Wall Street pre 2008 (by their house of cards mortgage backed securities scams that made them rich and caused America to go into a recession) they have less opportunities to make a quick and large buck unless they come up with other schemes that add no value and are to the long-term detriment of our country. This is another one of those schemes. If this isn't stopped, Wall Street will continue on to other well run/profitable companies and more Americans will lose jobs and more human capital/innovation will be lost.

    One final thought- if this actually went through, countries like China and Russia would take notice. Their governments could silently fund/back their companies to do the same tactics, and systematically take down some of our best companies- again, all while not adding value, taking away very badly needed American jobs, and tax revenues- extremely detrimental to our economy/country.

    We are exhausted of this behavior. This is a no brainer and shockingly right in front of our face. Our government/regulation needs to stop being silent and swiftly step in. They need to not wait until Allergan could potentially go under from these short-term antics. They need to protect us and stop letting criminals on Wall Street manipulate and destroy our country.

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Brendan Mathews

A Fool since 2005, Brendan is a research analyst on The Motley Fool's Stock Advisor newsletter. He enjoys scouring financial statements, pontificating on competitive advantage, and any outdoor activity.

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