Valeant, Ackman Propose Allergan Deal
Offer From Drug Company, Activist Values the Botox Maker at About $46 Billion
William Ackman, CEO of Pershing Square, is joining forces with Valeant to pursue Botox maker Allergan. Bloomberg
Activist investor William Ackman and Valeant Pharmaceuticals International Inc. VRX.T +5.74% on Tuesday revealed their offer to acquire Allergan Inc., AGN +15.82% valuing the maker of the wrinkle fighter Botox at about $46 billion.
The proposal for Allergan represents an unorthodox alliance between an activist investor and a serial acquirer of specialty drugs. Investors typically don't approach a potential acquirer before investing in a target. They generally take stakes in companies and then push for financial or operational change in a bid to boost the company's performance and its share price.
Quebec-based Valeant, which owns brands such as Bausch & Lomb, had been trying woo Allergan for some time, people familiar with the matter said, when Mr. Ackman approached it about working together on a deal.
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Heard on the Street: Deal-Making on Target
The deal, if successful, would create a behemoth in the global eye-care and skin-care drug industries. Valeant and Allergan each have a stock-market capitalization of more than $40 billion.
Valeant on Tuesday said it offered to swap each Allergan share for $48.30 in cash and 0.83 Valeant shares. Based on Valeant's closing price Monday, the deal values Allergan at about $152.89 a share.
Following the offer, Allergan shares jumped 15% to $162.99, suggesting that investors expect a higher offer down the road. Valeant, for its part, said the offer represents a substantial premium to Allergan's price of $116.63 on April 10, the day before Mr. Ackman's Pershing Square Capital Management L.P. crossed the 5% ownership level and began its rapid accumulation program.
Pershing owns a 9.7% stake in Allergan. Valued at about $4 billion, the stake represents his biggest investment ever, people familiar with the matter said. The firm has agreed to elect only stock consideration in the transaction and intends to remain a significant long-term shareholder of the combined company.
Allergan in a statement late Monday said its board would evaluate any offer or proposal received by Valeant and Pershing Square. At that point, the company said it "has had no discussions with either Valeant or Pershing Square with respect to this matter."
Valeant on Tuesday said it sees the deal producing at least $2.7 billion in cost savings, with 80% of that coming in the first six months. The combined company also would benefit from a high single-digit tax rate, Valeant said.
In addition, Valeant updated its guidance, saying it now expects its first-quarter per-share cash earnings to meet or beat analyst expectations. The company also raised its 2014 revenue range by $100 million.
An activist who wants to see a company get sold generally presses management to embark on a sale process. By teaming with Valeant, Mr. Ackman—a noted and often controversial activist investor—essentially eliminated a step, finding a willing buyer for a target.
The strange bedfellows came together after Mr. Ackman was introduced to Valeant by a Pershing Square employee who knows Valeant Chief Executive Michael Pearson. Mr. Ackman suggested he could help the Canadian company do a deal at some point.
Valeant and Mr. Ackman later signed an agreement in February to work together; Valeant told him it was interested in Allergan, of Irvine, Calif. Valeant was interested in Allergan in part because it saw more than $2.5 billion of cost savings if the companies were to pair up, said people close to Valeant.
Aligning with Mr. Ackman gives Valeant a nearly 10% head start in getting Allergan shareholders on its side. Plus, Mr. Ackman has experience running hostile corporate campaigns.
Still, the alliance represents an unusual crack in a typically sturdy wall between activists and companies. While companies have been showing greater receptiveness to activist approaches in recent years, in general, corporate America views activist investors as adversaries, not allies.
Valeant has lined up investment banks Barclays PLC and Royal Bank of Canada for financing.
A former McKinsey & Co. consultant, Mr. Pearson buys companies and eliminates much of the research-and-development costs while selling products through Valeant's existing sales force. He also has taken advantage of relatively cheap debt and the lower tax rates accorded companies based in certain countries overseas.
Mr. Pearson said earlier this year that he wants Valeant to be among the top five pharmaceutical companies in the world by the end of 2016.
With Valeant's growth fueled by acquisitions, some investors and deal makers say the company's complexity makes its stock hard to value.
Valeant and Allergan compete against each other in the global eye-care and cosmetic-treatment markets. Allergan is best known for products such as the anti-wrinkle treatment Botox, breast implants and a product that increases the length of eyelashes.
It also sells prescription drugs treating eye conditions like glaucoma and conjunctivitis. It has been facing the threat of competition for key products such as its Restasis dry-eye drug, one of its top-selling products.
Last year, Allergan reported $6.3 billion in revenue. Valeant notched $5.8 billion in 2013 revenue.
Mr. Pearson has said he likes the eye-treatment market because it is global and because governments and private health insurers are willing to pay for the treatments.
He also has said he likes the market for cosmetic-treatment products, because patients are willing to pay out of pocket.
Valeant also sells a variety of eye-care and aesthetic products, many acquired as part of its purchases of Bausch & Lomb and Medicis Pharmaceutical Corp. in recent years.
In competition with Allergan, Valeant sells its own version of a botulinum toxin wrinkle treatment, called Dysport. And Valeant, through its Bausch & Lomb acquisition, has been developing competitors for Allergan's dry-eye and other treatments.
Valeant would be prepared to sell some assets to allay any antitrust concerns, said a person familiar with the deal.
Mr. Pearson took the helm of Valeant in 2008 after a 23-year career at McKinsey where he worked alongside CEOs on turnarounds, acquisitions and strategy.
"We spend less than 5% of our revenues on research and development," Mr. Pearson said in a 2012 interview with the Journal. "Instead, our innovation comes from acquiring companies and products that are already approved and in the market, so we avoid the risk associated with R&D."