TheChek News Flow

Allergan Rejected Offer From Actavis Botox Maker Closes In on Its Own Bid for Salix

Pharmaceutical company Actavis PLC recently made a bid for Allergan Inc., AGN -1.24% but the Botox maker rejected the proposal and is closing in on its own takeover, said people familiar with the matter.

Allergan, which for months has been trying to fend off a $53 billion hostile takeover offer from Valeant Pharmaceuticals International Inc., VRX.T -2.32% is now in advanced talks to buy Salix Pharmaceuticals Ltd. SLXP -2.68% , some of the people said. Such a deal could make Allergan too big and complicated for Valeant to buy.

An Allergan acquisition of Salix, likely valued at more than $10 billion in cash, could be announced late this week or next, some of the people said. The talks, which have been on and off before, could fall apart again.

Salix has agreed to merge with a unit of Italy's Cosmo Pharmaceuticals COPN.EB -0.06% SpA and plans to locate the combined company in Ireland for tax purposes. An agreement with Allergan would likely halt that deal, which already is in danger of getting voted down by Salix shareholders, people familiar with the matter said.

Actavis lobbed its all-cash offer for Allergan last month, one of the people said. The amount of the bid couldn't be learned, but it was likely in the neighborhood of Allergan's current market value of roughly $50 billion. According to one of the people, Allergan rejected the offer in part because it is focused on sealing a deal with Salix.

Actavis remains interested in an acquisition of Allergan, but only if it is friendly, one person said. As part of its approach, Actavis pledged to maintain Allergan's investment in research and development, in contrast to Valeant, which has indicated it would cut back on such spending should its bid succeed.

Allergan has made no secret of its desire to make an acquisition of its own, and The Wall Street Journal reported in August that it had approached Salix, a North Carolina company specializing in drugs for gastrointestinal conditions that now has a market value of $10.3 billion. Allergan believes the deal could add significantly to its per-share earnings, a person said.

Allergan shareholders haven't raised much of a public fuss over the company's intention to make an acquisition that could thwart Valeant's cash-and-stock offer.

But the presence of a previously unknown alternative from Actavis could change that and upend the dynamics of the tussle. Allergan has questioned the value of Valeant's stock and criticized its rival's strategy of cutting R&D spending. Allergan could have a harder time arguing against a deal with Actavis, given that the bid was all-cash and that Actavis appears committed to R&D. That could prompt Allergan shareholders to pressure the company to start a formal sales process, some bankers said.

Still, Allergan may be able to buy Salix and stay independent. By paying for Salix with cash, Allergan would sidestep the need for a shareholder vote on the deal, which could stymie any move on the part of its shareholders to block the deal.

Salix shares rose more than 10% in after-hours trading, following The Journal's report on the talks.

Either way, news that the two companies are close to sealing a deal, and Actavis's entry into the fray, deepen the intrigue surrounding Allergan, a once-sleepy maker of eye drops that under Chief Executive David Pyott generated $6.3 billion in total revenue last year.

That a deal with Salix could be imminent is also bound to inflame tensions between Valeant and Allergan. The two companies have been sparring publicly and in court since Valeant in April made its bid in conjunction with activist investor William Ackman.

Allergan shareholders are slated to vote Dec. 18 on whether to oust a majority of its board—at a meeting sought by Valeant and Mr. Ackman. Valeant and Pershing Square Capital Management LP, Mr. Ackman's hedge fund, want to install directors who would be more likely to approve the deal and rallied the support of more than 35% of Allergan shares to hold the meeting. They will need at least another 15% to win the board vote.

Allergan, meanwhile, has sued to disqualify Pershing Square's 9.7% Allergan stake on the grounds it was accumulated in violation of insider-trading laws. Pershing Square and Valeant have said the trading was legal. That case is pending.

Once a small maker of generic women's health drugs, Actavis has been bulking up in recent years, in July paying $25 billion for Forest Laboratories Inc. Actavis, based in Ireland, has indicated it plans to continue making deals even as it seeks to increase its own sales to more than $15 billion next year.

Actavis is developing a portfolio of generic and branded drugs with a range of prices aimed at appealing to hospitals and other big drug buyers, CEO Brent Saunders and Executive Chairman Paul Bisaro said in June. Both men said their company was taking a different tack than Valeant by making major investments in developing new drugs and in marketing brands.

US in sweeping tax inversions crackdown

The Obama administration has issued sweeping rules to crack down on companies that use deals to move their headquarters overseas in tax-driven manoeuvres known as inversions. Democrats have become increasingly hostile to US companies that merge with rivals from countries with a lower tax rate to reduce their domestic tax bill and put their non-US earnings beyond the reach of US authorities. "We’re taking initial steps that we believe will make companies think twice" before carrying out an inversion, said US Treasury secretary Jack Lew. "For some companies considering deals, today’s actions will mean that inversions no longer make economic sense." Under rules announced by the Treasury on Monday, it will be harder for US companies to meet the requirements for an inversion and harder for those companies that invert to access their overseas cash piles without paying US taxes when they move cash between foreign countries. Thirteen inversion deals have been announced since the start of 2013 – including Burger King’s $11.4bn acquisition of the Canadian coffee shop chain Tim Hortons – and are together worth $178bn, according to Dealogic. The Obama administration resorted to using its executive powers to curb inversions as Democrats and Republicans in Congress cannot agree on how to tackle them via legislation. The new rules will stop non-US subsidiaries of inverted companies from making loans to their new foreign parent as a way to avoid paying US tax. They will also stop the new parents from buying overseas subsidiaries to free that cash from US tax. The Treasury is also making it harder for a US company to meet the current rules for inversion, which require shareholders of the foreign partner to own more than 20 per cent of the new company. For example, the changes ban the use of certain assets to inflate the size of the foreign merger partner. They also stop US companies from paying special dividends just before an inversion in order to reduce their own size, or spinning off part of their operations to shareholders for the same reason. The restrictions will impose a significant barrier to tax-driven deals where US companies buy foreign rivals, such as AbbVie’s $52bn bid for Ireland’s Shire this year. Concern about intervention to stem the tide of inversions has weighed on healthcare stocks, after a spate of inversions-driven deals in the sector. Most of the changes will not affect deals that have already closed before they were announced. The Treasury warned that it would continue to look for other steps to discourage inversions, and to review tax treaties. "We’ve recently seen a few large corporations announce plans to exploit this loophole, undercutting businesses that act responsibly and leaving the middle class to pay the bill, and I’m glad that Secretary Lew is exploring additional actions to help reverse this trend," said President Barack Obama in a statement. The rules remove some but not all of the tax advantages of an inversion. Charles Schumer, the Democratic senator for New York, welcomed the changes but said that only legislation would stop the practice. "It’s clear that without legislation that stops earnings stripping and defines an inversion more tightly, this egregious abuse is likely to continue," he said. Many on Wall Street believe the attack on inversions – and the rhetoric deployed – is a cynical attempt by Washington to avoid addressing the issue of reforming a US tax code that, they argue, makes it hard for its companies to compete globally. "What we are watching here is tough rhetoric and a clear intention to change market behaviour in a place where they arguably lack legal authority," said a senior Wall Street adviser. The move provoked further disagreement with the Republican party over the issue of tax reform. "Under President Obama, the United States has the highest corporate tax rate in the developed world," said a spokesman for John Boehner, Republican speaker of the House of Representatives. "The answer is to simplify and reform our broken tax code to bring jobs home – and help grow our economy and create even more American jobs."

After Hours Summary: SUPN +7.3%, ASNA -12.5%, ALCS -7.0% following earnings/guidance

After Hours Gainers: Companies trading higher in after hours in reaction to earnings: SUPN +7.3%

Companies trading higher in after hours in reaction to news: SAEX +9.9% (announced $40 mln of new project awards), ECYT +3.7% (announced late-breaking abstract presentation on vintafolide in second-line treatment of folate-receptor-positive non-small cell lung cancer patients at the European Society for Medical Oncology Conference), TTOO +2.1% (announced FDA approval of first direct blood test for detection of five yeast pathogens that cause bloodstream infections), ASTM +1.2% (Great Point Partners discloses 9.99% stake in 13G filing), LDOS +1.0% (awarded contract by Naval Medical Logistics Command)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings: ASNA -12.5%, ALCS -7.0%

Companies trading lower in after hours in reaction to news: AVNR -5.6% (announced offering of $200 mln of common stock), GEL -4.9% (announced public offering of 4.0 mln common units), OMC -0.7% (announced Randall Weisenburger steps down as CFO; Philip Angelastro appointed CFO), 

Asian Market Update: China HSBC Manufacturing PMI remains in expansion

***Economic Data*** - (CN) CHINA HSBC SEPT PRELIMINARY MANUFACTURING PMI: 50.5 V 50.0E - (AU) Australia ANZ Roy Morgan Weekly Consumer Confidence Index: 112.9 v 111.3 prior - (SL) SRI LANKA LEAVES REVERSE REPO RATE UNCHANGED AT 8.00% (EXPECTED); LEAVES REPURCHASE RATE UNCHANGED AT 6.50% (EXPECTED)

***Index Snapshot (as of 02:30 GMT)*** - Nikkei225 closed, S&P/ASX +0.1%, Kospi -0.4%, Shanghai Composite +0.2%, Hang Seng -0.1%, Sept S&P500 flat at 1,986

***Commodities/Fixed Income/Currencies*** - Dec gold flat at $1,218, Nov crude oil +0.8% at $91.36/brl, Dec copper +0.7% at $3.06/lb - GLD: SPDR Gold Trust ETF daily holdings fall 1.7 tonnes to 774.7 tonnes; Lowest level since Dec 2008 - (CN) PBoC to drain CNY18B in 14-day repos (17th consecutive drain); Offer yield at 3.5%, unchanged from prior - (AU) Australia MoF (AOFM) sells A$150M in 2.50% indexed bonds due 2030; Avg yield: 1.4683%; Bid-to-cover: 4.28x

***Market Focal Points/Key Themes*** - China HSBC flash manufacturing PMI - the first gauge of activity in September - avoided falling into contraction, reversing bearish sentiment on display in the US markets. Among notable components, New Orders and Export Orders increased at a faster rate, but Employment decrease accelerated. HSBC China economist noted "activity in the manufacturing sector showed signs of stabilization, (but) property downturn remains the biggest downside risk to growth", adding HSBC still expects more monetary easing from the PBoC in order to steady the recovery. Shanghai Composite turned higher after the PMI print, entering afternoon break +0.7% at session highs.

- Also of note in China, financials rallied after a local press report that banks are considering an adjustment to mortgage policy. Specifically, regulators would adjust the definition of "first home", potentially attracting more bidders looking to take advantage of the incentives. China also released its Q3 Beige Book that stated the economy remains stuck in low gear, with retail and residential real estate sectors struggling. Beige Book also warned the govt is unlikely to introduce large-scale stimulus.

- In the US, one of the FOMC's most dovish voices Kocherlakota said the Fed should adopt a more specific "inflation-targeting" price objective, reiterating policymakers should be very careful in removing stimulus. Kocherlakota also noted it was better to err on the side of higher inflation to secure recovery in employment. Treasury Sec Lew announced the govt will take more concrete steps against inversion tax-avoidance deals by companies. Treasury will publish new guidelines to deter overseas mergers driven by tax strategy and try to block inverted companies' tax-free access to foreign subsidiary earnings.

***Equities*** US markets: - SLXP: Allergan said to be in advanced discussions to acquire Salix after revising offer, valued over $10B - financial press; +10.6% afterhours - OMI: To Acquire ArcRoyal, a Privately Held Kitting Company Based in Ireland; Terms not disclosed; +2.3% afterhours - HLF: Fox's Gasparino: Carl Icahn has not sold any of his HLF holdings; +1.3% afterhours - MHFI: To Sell McGraw Hill Construction to Symphony Technology Group for $320M in cash; +0.2% afterhours - AAPL: Follow up: Denies earlier press report on plans to close Beats Music unit - Recode; -0.4% afterhours - ASNA: Reports Q4 $0.10 v $0.18e, R$1.18B v $1.22Be; -11.7% afterhours

Notable movers by sector: - Consumer Discretionary: Kathmandu Holdings KMD.AU -3.8% (FY14 results) - Financials: Sunac China 1918.HK +4.8%, China Vanke 2202.HK +2.9%, KWG Property 1813.HK +4.2% (China may adjust home mortgage policy) - Materials: Atlas Iron AGO.AU -3.4%, BC Iron BCI.AU -1.0%(iron ore miners continues to decline in momentum); Fortescue FMG.AU +3.2% (cost reduction plans); Cockatoo Coal Limited COK.AU +8.3% (project expansion approved) - Energy: Origin Energy ORG.AU +1.1% (successful spud) - Utilities: Transurban TCL.AU -1.1% (warning from S&P) - Telecom: TPG Telecom TPM.AU +3.5% (FY14 results)