Should AGN Just Take the Offer From Bill Ackman and VRX?

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You can say this much about Bill Ackman — there’s never a dull moment when he’s in the picture.

AGN VRX allergan valeantBefore the dust even had a chance to settle on the latest Herbalife (HLF) hullabaloo, his effort to facilitate the Valeant Pharmaceuticals (VRX) acquisition of Allergan (AGN) has inspired a lawsuit.

Neither AGN stock nor VRX stock moved a great deal after Allergan filed the suit last Friday. But, the whole thing has the potential to push both stocks around … and not necessarily a way in which current shareholders of either company will like.

What’s Going on Between VRX and AGN?

Before diving into any of the stocks involved, you’ll need some background.

The saga actually started way back on April 22 when Valeant Pharmaceuticals offered to buy Allergan for $47 billion, a 31% premium, mostly to get its hands on Allergan’s Botox business, which produces just less than $2 billion in revenue per year. The specific offer was $48.30 in cash for every share of AGN, plus 0.83 shares of VRX.

That in and of itself wasn’t an unusual bid. What was unusual is how it seemed to be spurred by Bill Ackman, manager of hedge fund Pershing Square, just a few days after the fund had acquired 9.7% of the target company. A self-serving maneuver, but not an illegal one.

Allergan wanted nothing to do with it. In fact, on the very same day Valeant tipped its hand, AGN swallowed a proverbial poison pill that would prevent Pershing Square from taking on a stake bigger than the 10% he already owned. Still, Ackman already had enough of a stake to start shaking up the board of directors.

Fast forward to May 12, when Allergan officially declined the $47 billion offer from VRX, explaining Valeant’s plans to cut R&D weren’t in the organization’s best long-term interests. The very next day, Valeant reported it would raise its offer, but on the same day, Pershing Square floated the idea of exercising its right to call for a non-binding shareholder vote on the matter (a proxy battle that’s still brewing, by the way).

True to its word, on May 28, Valeant upped its bid for Allergan to $163 per share, then two days later, it upped its offer again to $177. At that price, the offer hit a stunning total of $53 billion, but AGN didn’t budge, rejecting Valeant’s third offer on June 10.

Bill Ackman didn’t quit, nor did Allergan stop looking for ways circumvent a hostile takeover by Valeant.

By early July, Allergan was reported to be mulling a bid to acquire Irish drug manufacturer Shire Plc (SHPG), just to make itself less appetizing for the suitor. AbbVie (ABBV) stepped up to the plate with cash before AGN, however, acquiring Shire in mid-July, pushing Allergan back to square one.

Pershing Square continued to plan its proxy battle while simultaneously planning a non-optional shareholder meeting on the matter. In the meantime, Allergan was planning a new maneuver of its own, unveiling it at the end of last week.

Now AGN is claiming Ackman and Pershing Square unfairly profited by using insider information regarding the impending bid in April. AGN is so adamant about its argument, in fact, it’s suing both Bill Ackman and VRX, claiming the two parties were knowingly planning a hostile takeover from the onset of the formation of their partnership and Pershing Square’s purchase of AGN shares. As of Tuesday, Aug. 5, Ackman has denied Allergan’s claim and is still planning to force a shareholder vote on the issue. And, so far, Allergan is still planning to follow through with its filed lawsuit.

Barring anything else popping up in the meantime, this should catch you up on this amazing saga.

It still doesn’t answer a key question, however.

Is What Bill Ackman and Valeant Did Actually Legal?

There’s always more to the story, and one never really knows what kind of mood a judge and jury might be in on any given day. But, as it stands right now, Allergan doesn’t have the strongest of legal arguments.

The takeover attempt isn’t in question. What Allergan’s claim suggests is that Bill Ackman was perfectly aware he and Valeant would eventually launch a hostile takeover bid, since Allergan wasn’t willing to be acquired amicably. It’s a potential impasse, as federal law forbids anyone with knowledge of an impending hostile takeover from taking on a position in that stock. The loophole Valeant and Bill Ackman are using: The law only applies if the suitor has actually taken significant steps toward a purchase. Pershing Square bought its stake in AGN before Valeant had even made a friendly tender offer.

It’s a nuance, but as the law stands, the deck is still stacked against Allergan.

Of course, a legal victory might not be completely necessary for Allergan to “win.” Simply delaying Ackman’s effort to bring the acquisition to a shareholder vote could give Allergan time to find a target, take another poison pill, find another suitor or simply let the market lose interest.

The vote might not be allowed to happen until the lawsuit no longer looms, and as of right now, it could be until 2015 before the lawsuit is removed from the equation (one way or another).

Legal or not, there is one risk in play here that all current AGN shareholders might want to consider — your shares are now up 33% since April and are up 91% since the mid-2013 low thanks to a rather generous offer from VRX.

There might not be a better offer out there.

And should the Valeant offer fall through, don’t be surprised if the bottom falls out on AGN shares.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/08/agn-vrx-bill-ackman/.

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