Healthcare companies have been completing merger and acquisitions this year at record pace to counter ongoing patent cliff troubles, as well as political gridlock in the U.S. over corporate tax reform.
Activist investor Bill Ackman and his hedge fund, Pershing Square Capital Management, have been doing their part by trying to push a buyout of Irvine, Calif.-based Botox maker Allergan (UNKNOWN:AGN.DL) by Valeant Pharmaceuticals (NYSE:BHC). Allergan has resisted this buyout: The initial $46 billion offer was viewed as "grossly inadequate" and the company isn't thrilled with the high potential for widespread layoffs following a buyout.
The bid has now turned hostile, with a special shareholder meeting set for December that could see the ouster of Allergan's board, the main opponent to a takeover. As a last ditch effort, Allergan has reportedly opened talks with Salix Pharmaceuticals (UNKNOWN:SLXP.DL) about a possible merger, with the hope that the combined entity would be too large for Valeant to swallow.
Specialty and generic drugmaker Actavis (NYSE:AGN) has reportedly been interested in merging with Allergan for a few weeks now. Valeant and Pershing Square upped their offer for Allergan by $15 a share to $192, for a grand total of $57.4 billion earlier this week, per my estimates (the last offer was at $177 a share, or $53 billion).
Interestingly, Actavis was reported, almost immediately, as having discussed offering $200 a share for Allergan following Valeant's new bid, with Allergan's board being much more receptive to this deal. In sum, Allergan has purportedly considered putting a nearly $60 billion offer on the table for Allergan, which would work out to a massive 70% premium compared to where Allergan shares stood when Valeant's first offer was announced.
Putting this dealmaking into context
A 70% premium is a heavy price to pay for any company. Nonetheless, I've made the case elsewhere that such a hefty premium is justified in Allergan's case given the company's growth prospects. Specifically, I placed a value of $66 billion on the botox maker, and suggested that Valeant, along with Ackman, were trying to snatch up Allergan on the cheap.
Keeping with this $60 billion-plus valuation, Allergan's board was reportedly open to discussing offers at or above $200 a share, putting its position in line with my own. Actavis' entry into the fray appears to have forced Valeant to make a more appropriate offer, in fear that six months of work could slip away.
Can Actavis really offer $200 a share?
Actavis has been gobbling up specialty drugmakers left and right over the past two years. On Monday, the company paid $675 million for Durata Therapeutics (UNKNOWN:DRTX.DL), and it has even been eye-balling Salix in another multibillion-dollar deal. The bottom line is this: Actavis has taken on a large amount of debt through all these deals, and a $60 billion buyout of Allergan would put the company deep into the hole.
Looking at the logistics of such a deal, I think an Actavis-Allergan merger looks far-fetched at this point, and there are probably other motives behind this timely news leak. My guess (and bear in mind it's only a guess) is that Actavis is actually interested in Salix, a company it can realistically buy out with its current resources.
So, Actavis would help Allergan out by driving up Valeant's offer and help to nix an Allergan-Salix hookup at the same time. Win-win for everyone -- that is, except Valeant.
I've viewed Pershing Square's efforts on this merger as a lowball offer from the get-go. So if Actavis is going the false flag route, it would still only push the bid offer into the fair range of Allergan's valuation, per my estimates.
What's particularly telling is that Actavis hasn't actually made a solid offer for Allergan, but we've heard plenty of leaks describing "high level talks between the two companies." When all is said and done, I don't think Actavis' interest in Allergan is real, with the actual object of its affections being Salix. In sum, an Allergan-Valeant pairing is looking more probable every day and an Actavis-Salix deal might be next to go down. Stay tuned.