Is Valeant’s Big Offer for Allergan Big Enough?

Or is Valeant set to offer even more?

| More on:
The Motley Fool
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

On April 22, 2014, Valeant Pharmaceuticals (TSX: VRX)(NYSE: VRX) made an unsolicited offer of around $46 billion to the shareholders of Allergan (NYSE: AGN), a top-tier pharmaceutical company. The cash and share offer, which amounted to around $154 per Allergan share, represented a substantial premium compared to the $115-$125 price prevailing in the weeks before the offer was made.

After the Allergan board’s rejection of the initial offer, the Valeant board improved the offer further on two occasions. On May 28, 2014, the cash component of the offer was increased to $58.30 per share from $48.30 per share, and again to $73 per share two days later. The 0.83 share exchange ratio remained unchanged but Valeant also included a contingent value right linked to future sales of a drug that is still under development.

Based on the current share price of Valeant, the offer is worth around $183 per Allergan share, excluding the speculative component of the contingent value right. The offer values Allergan at a 2014 EV/EBITDA ratio of 21 times; this is considerably higher than the valuation of a representative peer group, which trades on an estimated multiple of 12 times. Based on Valeant’s calculation of $2.7 billion in savings through a business combination, the offer multiple could drop to an estimated 14.5 times, which would still represent a considerable premium to the peer group valuation.

Will Valeant increase the offer a third time?

The offer on the table is, in my view, already a full price for Allergan. In addition, Valeant has limited options to further increase the cash component of the offer given its already stretched balance sheet and limitations on the issue of additional shares. Apart from marginal tweaking, it is therefore unlikely that the offer will be further materially improved.

What will Allergan’s shareholders do?

Apart from the two bidding parties (Valeant and Pershing Square, which combined hold 9.7% of Allergan’s shares), the other shareholders are mainly investment funds. Although this battle may continue for much longer with interesting twists and turns, one could imagine that these shareholders would look to optimize the windfall profit brought about by the Valeant offer.

Given the rich offer already on the table, the considerable execution risks to Allergan’s shareholders, and perceptions of an inflated Valeant share price and unsustainable business model, current Allergan shareholders may be tempted to sell their stock in the market to lock in the considerable gains they have already experienced.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Deon Vernooy does not hold a position in any company mentioned above.

More on Investing

funds, money, nest egg
Dividend Stocks

TFSA Passive Income: 2 Great Canadian Dividend Stocks for Retirees to Buy Now

Retirees seeking reliable passive income can now buy top TSX dividend stocks at cheap prices.

Read more »

man window buildings
Stocks for Beginners

Foolish Beginners: 1 Stock Pick to Buy Now for a $6,000 TFSA

Brookfield Asset Management (TSX:BAM.A)(NYSE:BAM) stock looks cheap as shares regain their footing.

Read more »

data analyze research
Dividend Stocks

Earn Monthly Passive Income: 2 Hot Dividend Stocks in Canada to Buy Now and Hold Forever

These two hot dividend stocks could help you to earn stable monthly passive income in Canada.

Read more »

Human Hand Placing A Coin On Increasing Coin Stacks In Front Of House
Dividend Stocks

Be a Landlord: Top 2 REITs (With Monthly Dividends) I’d Buy and Forget

You can be a landlord and earn monthly dividends for the rest of your life. All you need is the…

Read more »

Target. Stand out from the crowd

3 Canadian Stocks to Buy That Beat Their Earnings Expectations This Week

If you're looking for top Canadian stocks to buy, here are three impressive companies that continue to perform well in…

Read more »

A stock price graph showing declines
Energy Stocks

2 Cheap Canadian Stocks That Likely Won’t Be on Sale For Much Longer

These two Canadian stocks are close to returning to all-time highs. Don’t miss your chance to take advantage of these…

Read more »

A worker gives a business presentation.
Dividend Stocks

Got $5,000? 3 Stocks to Hold for the Next 20 Years

New investors don’t need tens of thousands to start a portfolio. Here are three stocks to hold for the next…

Read more »

canadian energy oil
Energy Stocks

3 Rising Energy Stocks to Buy as Oil Hits 6-Month Low

Three rising energy stocks are strong buys today as their upward momentum is likely to continue due to the tight…

Read more »