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Dubious carrot

2 June 2014 By Robert Cyran

Valeant is pushing its $54 billion deal with the help of a carrot and two sticks. The pharmaceutical group raised its offer for Allergan again on Friday, on the condition that the board of its target cooperates. Meanwhile hedge fund boss Bill Ackman on Monday threatened to unseat six directors – and Valeant could yet decide to go fully hostile. But questions over Valeant’s own stock remain its biggest weakness.

Allergan previously questioned Valeant’s accounting and compared its acquisitive rollup strategy to that which felled Tyco International under Dennis Kozlowski. The aggressive counterattack put Valeant on the back foot after an earlier rather feeble-looking increase in its offer. The latest more significant boost, by another 8 percent-plus, puts the heat back on Allergan’s board and Ackman’s move adds to the pressure to be seen to take Valeant seriously.

The new offer works out to about $181 per Allergan share, of which $72 is in cash. The extra money on offer is all in the cash component. That reflects the fact that Allergan’s managers aren’t the only people worried about the quality of the paper on offer.

The Valeant business model involves buying rivals for growth and slashing research and development to juice profits. The company’s dramatic expansion means it needs more and bigger deals to move the needle – and even existing pharma revenue can decline as drugs lose patent protection. If Valeant eventually takes the risky hostile route, it could mean it has already reached the stage where there’s an element of desperation in its quest for growth.

Indeed, Valeant Chief Executive Michael Pearson says he was incorrect in saying in January that his goal was to triple the company’s market value to about $150 billion within three years. This was “more a statement that we are not just going to sit back and do nothing.” Pearson now says the company doesn’t care about size, only about shareholder value.

The premium in Valeant’s offer – which is now worth more than 40 percent more than Allergan’s undisturbed share price – coupled with the increased slug of cash might win over shareholders. And the twin proxy threats could also help bring Allergan to the table. The majority of the value, however, still comes in Valeant stock. That’s the part of the carrot that might make Allergan’s investors sick if they swallow it.


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