Valeant kicks off official offer to Allergan shareholders

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Valeant Pharmaceuticals International Inc. has started the process of formally taking its unsolicited takeover offer for Allergan Inc. to shareholders.

The exchange offer proposes that Allergan shareholders exchange each of their Allergan shares for $72 (U.S.) and 0.83 of a Valeant share.

The offer is contingent on Allergan shareholders approving the issuance of Valeant common shares in the acquisition; Laval, Que.-based Valeant said on Wednesday it plans to file a preliminary proxy statement on a special meeting of Valeant shareholders soon.

"We believe Allergan's stockholders should have the opportunity to express their views and we are confident that Allergan's stockholders will support this combination," said Valeant chief executive officer Michael Pearson.

"This offer, together with Pershing Square's ongoing efforts to call a special meeting of Allergan stockholders, is part of Valeant's clear path to complete a transaction with Allergan."

Activist investor Bill Ackman's Pershing Square Capital Management LP is Allergan's largest shareholder and Valeant's partner in the takeover bid.

Pershing Square is preparing a mailing of proxy materials calling for a special meeting later this year to oust most of Allergan's board members.

A change in the Allergan boardroom could clear the way to removal of the target company's so-called "poison pill" that prevents shareholders from acting on Valeant's tender offer.

California-based Botox-maker Allergan is vigorously fighting Valeant's $54-billion takeover attempt, saying it is too risky and undervalues Allergan shares.

Valeant says a tie-up with Allergan would produce major cost savings without hurting the latter's R&D and sales and marketing activities.

Allergan said on Wednesday that the board will "carefully review and evaluate the exchange offer" and advised shareholders to take no action at this time.

The exchange offer expires Aug. 15, barring an extension.

The company pointed out that it previously received and rejected a revised proposal from Valeant.

On Tuesday, Mr. Pearson and Valeant chief financial officer Howard Schiller presented their case on a conference call and Web presentation that was also intended to clear up what Valeant says are misrepresentations by Allergan of the company's performance and financial reporting.

BMO Nesbitt Burns analyst David Maris said in a note Tuesday that the call "did little to clear the air of concerns that many Allergan shareholders have over the Valeant business model.

"For some Allergan investors, Valeant's financials are what give them the most concern, and we do not think today's call hit on many of the point's Allergan's shareholders have raised to us. As compared to Allergan, Valeant's organic growth is small, Valeant's debt has risen dramatically from approximately $3.2-billion in 2010 to $16.7-billion now, GAAP [generally accepted accounting principles] results show a loss, receivables have risen much faster than sales, and goodwill as a percentage of total assets has risen dramatically (from approximately 5 per cent in 2009 to 35 per cent in 2013)."

Mr. Maris also questioned the timing of the departure last Friday of a senior executive in Valeant's aesthetics division. Valeant said the departure is due to the company selling its aesthetics business, but Mr. Maris wondered why the executive would leave just as Valeant prepares to "acquire a leading aesthetics company."

He also questioned how smooth a process Pershing Square's attempts to change the board will be.

The "assumption that the new board members would support the deal seems to indicate that the proposed board members are not actually independent, but likely to be hand-picked to effect a result, something with which the remaining board members and Allergan shareholders may not agree."

The takeover battle could be a long one, Mr. Maris cautioned.

"From a process standpoint, we believe that shareholders should anticipate that this process will run well into next year."