In the real world, if you ask a person out and they not only tell you "no" but then proceed to offer a multipage summary of all of your failings (at least in their eyes) and why they would be better off alone than with you, it's usually safe to say that it is time to move on. While corporate finance is part of the real world (allowing for liberal definitions of "real"), it certainly doesn't take the same view on rejection – while Allergan (NYSE: AGN.DL ) has, in so many words, told Valeant (NYSE: VRX ) to drop dead and take its unsolicited offer with it, Valeant remains undeterred and has come back with yet another offer.
Try, try again
Valeant and Allergan have slung a multitude of words and slides at each other (and Allergan's shareholders) in the course of this attempted acquisition, and the latest move is an "improved" offer from Valeant.
Valeant is proposing a new offer with a higher cash component ($58.30 per Allergan share, or almost 21% higher) and the same 0.83 shares of Valeant. Using the prior day's close on Valeant, that represents a $166 per share offer for Allergan.
This time around Valeant also offered a contingent value right tied to the level of sales (if any) of Allergan's Phase II wet AMD asset DARPin. Opinions vary greatly on the value of DARPin today, with bulls seeing multibillion dollar potential and bears seeing it as a me-too drug that will struggle against Roche and Regeneron. The CVR tied to DARPin could be worth as much as $25 to Allergan shareholders, though it will take years for that value to develop.
And clearing the decks
Valeant also announced that it reached an agreement with Nestle (NASDAQOTH: NSRGY ) to sell virtually all of its aesthetics business, toxins and fillers, to Nestle for $1.4 billion. Nestle in the midst of acquiring L'Oreal's 50% interest in Galderma, the world's second-largest dermatology business behind Valeant, and this transaction should push Galderma back into the #1 spot in dermatology, ahead of Valeant, Novartis, and Glaxo, though there is some debate as to what constitutes "dermatology" and "aesthetics" when calculating these market shares.
In any case, this deal will largely eliminate any potential regulatory/antitrust issues with Valeant owning Allergan and its line of fillers and toxins led by Botox. It doesn't entirely unwind the $2.6 billion deal for Medicis back in 2012, as the aesthetics business was about 40% of Medicis, and the deal does includes filler assets acquired with Sanofi's dermatology business Dermik (acquired for $425 million in 2011). Nevertheless, it does not suggest that Valeant really managed to add significant value; if these assets have grown at a 10%/yr rate since Valeant bought them, Valeant is selling them at a multiple close to what they paid originally (somewhere between 3.3 and 3.5 times sales).
Not enough to swing "go away" to "yes"
It seems unlikely that Valeant's new proposal will win over Allergan's board. Allergan has been on a charm offensive designed to highlight the value of Allergan as a stand-alone enterprise (and, most likely, to highlight its potential value to other, friendly acquirers). In the process, Allergan has also been sharply critical of both Valeant's acquisition proposal and the structure of its own business.
Allergan has pointed out that Valeant's reported "organic" growth excludes the impact of drugs that have gone generic (most pharmaceutical companies don't exclude that) and that there are substantially differences between Valeant's reported cash flow and its "adjusted" cash flow. Allergan has also pointed to past realized synergies in prior acquisitions (including Bausch & Lomb and Medicis) to highlight Valeant's aggressive assumptions for this deal and has also asserted that there have been meaningful declines in both the Bausch & Lomb and Medicis business since Valeant acquired them.
To some extent, Allergan is just firing repeated broadsides in the hopes that some of the accusations will stick. The organic growth issue, for instance, is annoying but not unprecedented (and I believe investors can still find the "real" number through Valeant's filings). Likewise, the attacks on Valeant's "adjusted" accounting numbers ring a little hollow as Allergan itself has used similar adjustments in the past. Nevertheless, Allergan's concerns about the gulf between "real" and "reported" cash flows do echo some of my own concerns with Valeant, and I can say that my own due diligence calls in ophthalmology and aesthetics support the idea that Valeant has leaned hard on aggressive pricing with both Bausch & Lomb and Medicis (possibly compromising long-term competitiveness).
Turning back to the deal, I don't see Valeant getting a deal done with an implied value below $180 per Allergan share and/or only about 35% of the deal value in upfront cash. The problem is, I don't know if Valeant can live with the terms it will take to get Allergan willing to talk ($80 in cash and/or $180/share-plus in total deal value). Given the past history of roll-up acquisition stories (when the acquisitions stop, so does the growth, and the valuation starts crumbling), I understand Allergan's stubbornness – maybe Valeant is the exception to the rule, but Allergan's board wants to see Valeant pay, and pay handsomely, for them to take on that risk.
The bottom line
With friendly bidders not exactly lining up to outbid Valeant – Johnson & Johnson appears to be unlikely to get involved, given management's comments at a recent analyst day, and Nestle too would now seem to have much less interest/ability to acquire Allergan – Allergan's best strategy seems to be sowing doubt as to the long-term viability of Valeant's model and share price. It's a reasonable strategy if Allergan's board truly questions the sustainability of Valeant's model, but there's still the risk that Valeant takes its pitch directly to Allergan's shareholders and manages to turn them against the board.
I've written before that I have my doubts about Valeant's high-risk/higher-growth business model. I certainly don't think Allergan shareholders need Valeant to "rescue" them, so if I were Allergan I'd hold out for a less risky deal that includes a bigger cash component (or at least a deal structured to give Allergan shareholders the option of a higher cash/lower stock component if that is what they want). Given the importance of Allergan to Valeant, though, I don't expect this to be the last word in this pursuit.
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