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A doctor demonstrates how Botox – Allergan’s signature product – and other anti-wrinkle medicines are applied through syringe to a patient. (MIKE SEGAR/REUTERS)
A doctor demonstrates how Botox – Allergan’s signature product – and other anti-wrinkle medicines are applied through syringe to a patient. (MIKE SEGAR/REUTERS)

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There may be a third way for Allergan investors Add to ...

Allergan investors may yet be given another option. The company’s conservative fiscal ways left it vulnerable to a hostile $51-billion (U.S.) bid from Valeant Pharmaceuticals. Additional cost cutting and returning capital to shareholders would be a persuasive standalone response. Behind door No. 3 three could be a bold acquisition. Allergan shareholders are likely to be spoiled for choice.

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The takeover is now worth about $172 a share, roughly a 40-per-cent premium to Allergan’s undisturbed price. Supported by hedge fund boss Bill Ackman, whose Pershing Square Capital owns nearly 10 per cent of Allergan, it’s a tempting offer. There are good reasons to be skeptical about accepting Valeant stock, though, which makes up the majority of the deal’s value.

David Pyott, Allergan’s boss, reckons his company can increase earnings by 20 per cent annually over the next five years as it introduces new drugs and expands medical uses for its blockbuster Botox. If it also slashes $500-million of costs over the next two years, as Buckingham Research estimates, it would mean a fast-growing Allergan could generate $10 a share by 2016. Over the last decade, the market has valued the company at a median of about 20 times its next 12 months of earnings, according to Reuters Eikon. That would put the shares at $200.

It would require solid execution and therefore may not be enough to warrant rejecting Valeant’s bird in hand. Allergan’s balance sheet, however, might play a role. At net cash of $1.5-billion, the company could borrow $10-billion without harmful effects. Returning it to shareholders in the form of a special dividend would make Allergan harder to acquire. Valeant already carries $17-billion of debt. Even after cutting $2.7-billion of costs, the acquisition could create too much leverage to bear.

Allergan is also contemplating a deal of its own, at the behest of its owners, according to Mr. Pyott. An overseas target that offers similar growth and tax savings by moving headquarters would make for the most likely candidate. In that scenario, shareholders would have to vote on the matter because of the amount of stock that would need to be issued. A shotgun inversion marriage would invite a great deal of extra risk. Either way, Allergan investors at least are set to get a say in their destiny.

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