As we reported yesterday, Bill Ackman bought up only $76 million in Allergan stock knowing well in advance Valeant would submit a bid for the company, guaranteeing (as in absolutely no risk at all) that the stock would soar, with the rest of the purchase comprising of AGN calls. It is unclear just how much actual capital at risk he put up but indicatively May $150 call options that cost $1.55 per contract on Monday were trading at $15.53 in midmorning trading on Tuesday, a roughly ten-fold increase in one day.
In other words, Ackman not only used material public information to frame his trade - perfectly legally, thank you SEC - but, as is to be expected of a hedge fund manager whose recent track record has been spotty at best, applied massive leverage in the form of calls to make up for any residual humiliation. That said, Ackman may want to consider selling his calls to the primary (and very unhappy because no amount of delta hedging could have offset all the losses) broker he bought them from while they are still solidly in the money, because Allergan may have a very different opinion on promptly selling itself to Valeant than what Ackman thought.
Specifically, Allergan on Tuesday night said that its board of directors had adopted a one-year stockholder rights plan to give it more time to consider takeover proposals. The Valeant offer was made with Pershing Square Capital Management hedge fund, which built up a stake in the company.
The chief executive officer of Valeant Pharmaceuticals, which made a $47 billion unsolicited offer for competitor Allergan Inc. on Tuesday, said during an interview on CNBC that he was "disappointed" with Allergan's so-called poison pill.
"We are disappointed but on the other hand, I think this deal will get done," Valeant CEO Michael Pearson said on Wednesday.
So besides accepting or outright rejecting Valeant's bid, what other options does Allergan have? Here is Bloomberg with the full menu:
Valeant’s proposal currently stands at $48 billion, or almost $161 a share. Sterne Agee Group Inc. said the offer is too low because Allergan has appealing growth prospects as a stand-alone entity. Shareholders may demand a price closer to $180 a share, said Cowen Group Inc. Valeant could face competition. Sanofi, Nestle SA or GlaxoSmithKline Plc could swoop in as white knights, said Shibani Malhotra, a New York-based analyst at Sterne Agee. “They will do everything they can to fight this.” Morningstar Inc. sees Novartis AG and Johnson & Johnson as possible counterbidders.
Valeant is offering Allergan investors $48.30 in cash and 83 percent of a Valeant share for each one of Allergan. The offer was worth about $47 billion, after subtracting Allergan’s net cash, at the close of trading yesterday.
Valeant has teamed up with Bill Ackman’s Pershing Square Capital Management LP, which has a 9.7 percent stake in Allergan. Based on stock prices before the announcement, the transaction valued Allergan at 21 times trailing 12-month Ebitda, data compiled by Bloomberg show. The last time Allergan had that multiple was more than six years ago.
Ackman told a conference yesterday that he is contractually committed to support Valeant’s deal, “unless and until there is a superior offer that Valeant chooses not to respond to.” If Allergan’s shareholders deem a competing bid superior and Valeant chooses not to participate, “I guess we’d be cashed out in that deal,” he said.
Valeant’s proposal may need to be raised to about $180 a share to win over Allergan shareholders, according to Ken Cacciatore, a New York-based analyst at Cowen.
That would be great news for Ackman whose calls will only raise in value. In fact the only worst case scenario for Pershing Square is if there is a sudden cooling in the pharma M&A bubble, ostensibly driven by a market tumble, which would not only result in a pulling of the Valeant offer which is so massively reliant on cheap and easy debt, but a crash in Allergan stock. Of course, there is the possibiliy that Allergan will simply say no, and no other bidders will appear.
There’s a high likelihood that Allergan will rebuff the unsolicited offer as is, which may force Laval, Quebec-based Valeant to raise it or may create an opportunity for other interested suitors, said Michael Waterhouse, an analyst at Morningstar.
“Allergan is seen, in the specialty pharmaceuticals space at least, as probably one of the best managed and one of the best opportunities,” Waterhouse said in a phone interview. “It could stir a little bit of thought from J&J and Novartis that maybe they don’t want this one to get away.” J&J said earlier this month that that it is ending development of PurTox, a potential competitor for Botox. That may make an acquisition of Allergan even more compelling for the company, Waterhouse said. Novartis may be tempted to bid to gain Allergan’s ophthalmology assets, which include Restasis eye drops, he said. Allergan, which also makes products to treat acne and psoriasis, would be a good fit for European drugmakers Sanofi and Glaxo, as well as Nestle, which said in February it’s taking full control of its Galderma skin-care joint venture with L’Oreal SA, Malhotra said.
Sure, Allergan is valuable. But at what price? And how much leverage is any strategic buyer willing to take on in exchange for onboard a cash flow stream that may or may not last for more than a few years.
In either case, keep a close eye on this one: Ackman expected a 10x return on JCP, instead he lost half his investment. In AGN he has already made his profit which means at this point the deal is his to lose.