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Allergan Tussle Injects Fat Premium Into Botox Maker: Real M&A 2014-11-06 22:44:24.544 GMT
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By Tara Lachapelle Nov. 7 (Bloomberg) -- As the contest to win control of Allergan Inc. heats up, so has the valuation. The Botox maker’s pricetag has doubled in the past year as Valeant Pharmaceuticals International Inc. persists with its hostile bid and Actavis Plc sidles up. The $59 billion target’s profit multiple is already 60 percent higher than the median of past pharmaceutical takeovers that large, according to data compiled by Bloomberg. Most megamergers generate losses for shareholders, so Allergan’s winning bidder will have to work to justify the price. Valeant, a serial acquirer, is known for cutting costs at the businesses it purchases. Piper Jaffray Cos.’s David Amsellem says Actavis also can cut costs at Allergan and leverage its department that markets medicines to primary-care doctors. Actavis would be gaining a business that increases profit about 20 percent a year or more, the New York-based analyst said. “There’s always a risk of overpaying, but I think you have to consider the extent of synergies and tax efficiencies,” Amsellem said in a phone interview. And given Allergan’s earnings growth, “I wouldn’t say it’s a particularly expensive stock.” Three-quarters of analysts covering Allergan still recommend investors purchase shares at this level, according to data compiled by Bloomberg.
‘Inadequate’ Offer
Allergan has an offer on the table from Valeant that it says is “grossly inadequate.” Allergan shares have risen for eight straight days to a record $197.40 apiece yesterday, well above Valeant’s bid. Valeant said last week that it’s prepared to raise the offer to at least $200 a share. As Allergan seeks to fend off the hostile suitor, the company said in a filing yesterday that it’s in talks with another party that may lead to merger negotiations, without providing further information. That third party is Actavis, people with knowledge of the matter said yesterday. Even Actavis shareholders are cheering on the possible deal, with its stock rising 1 percent yesterday. If history’s any guide, those shareholders are more likely to lose money after a merger this big. About two-thirds of company takeovers that exceeded $20 billion between 1996 and 2013 destroyed value, data compiled by Bloomberg show. The acquirers also lagged behind the MSCI World Index in the three years after completing the deals, according to the data. Pfizer Inc.’s $64 billion acquisition of Pharmacia Corp. in 2003 is one such example. Pfizer posted the worst underperformance among the buyers analyzed.
Different Today
There are differences between those past deals and the current wave of acquisitions in the pharmaceutical industry. For one, many of the acquirers today are moving or have moved their legal addresses overseas where the tax rate is lower, giving them more room to pay up for purchases. Both Valeant and Actavis have undergone this type of inversion deal. Valeant is based in Laval, Quebec, while Actavis is domiciled in Dublin. Their interest in Allergan is putting the company into the rankings of expensive deals. Allergan was valued yesterday at 25 times trailing 12-month earnings before interest, taxes, depreciation and amortization, double its valuation a year ago. Attempted or completed takeovers larger than $20 billion in this industry have a median multiple of just 15.6, data compiled by Bloomberg show.
Familiar Territory
It’s familiar territory for Actavis, which struck the priciest pharmaceutical megadeal ever, paying almost 300 times Ebitda for Forest Laboratories Inc. earlier this year. The $25 billion takeover transformed generic-drug maker Actavis into a developer of brand-name medicines. Actavis shares have risen 12 percent since the deal closed. Valeant has built its business by acquiring companies and cutting research and development spending and other costs. The $43 billion drugmaker estimates about $2.7 billion of savings from an Allergan purchase. We don’t yet know Actavis’s synergies estimate. “You don’t want to get into any kind of bidding war or situation where you end up overpaying,” David Steinberg, an analyst at Jefferies LLC, said in a phone interview. “The question is, is that the zone we’re getting into?” Whether it is depends on the assumptions the acquirers are factoring into their offers, such as revenue synergies, cost reductions and tax efficiencies, he said. “One of the worst things that can happen to a company is doing a bad deal,” Steinberg said. “That said, Allergan is one of the most unique and high-quality assets there are in health care. Companies like this don’t come around often.”
For Related News and Information: Allergan Said to Be in Active Deal Discussions With Actavis NSN NEMMY16JTSE9<GO> Allergan Tilts Toward Valeant in Merger Chain Reaction: Real M&A NSN NCVYW46KLVR9 <GO> Daimler to Rio Tinto Show New Surge in Deals Perilous: Real M&A NSN MHG24A0UQVI9 <GO> Real M&A columns: NI REALMNA <GO> Top deal stories: DTOP <GO>
--With assistance from David Welch in New York.
To contact the reporter on this story: Tara Lachapelle in New York at +1-212-617-8911 or tlachapelle@bloomberg.net To contact the editors responsible for this story: Beth Williams at +1-212-617-2307 or bewilliams@bloomberg.net Elizabeth Wollman