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Valeant touts quick cost cuts in $45B hostile bid for Allergan

M&A-focused drugmaker teams up with activist investor to bolster its offer
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Look out, Allergan. Valeant's coming for you. And it brought backup.

As The Wall Street Journal reports, the Irvine, CA-based Allergan ($AGN) is the latest apple of deal-happy Valeant's ($VRX) eye. And allied with activist investor Bill Ackman--who recently flew under the radar to amass a 9.7% Allergan share--it might just have the heft to pull off a pickup, with or without Allergan's blessing.

Valeant outlined its terms for Allergan's board Tuesday, proposing to exchange $48.30 in cash and .83 shares of Valeant's stock for each Allergan share. That values the deal at $45.7 billion. The combined company would enjoy a high single-digit tax rate, not to mention more than $2.7 billion in synergies--the sort of cost cuts Valeant CEO J. Michael Pearson is famous for.

Some 80% of those cuts would come in the first 6 months, and the rest would follow within the first year; no surprise, since Pearson likes to move quickly with his ax. Presuming those cuts are achievable, they would be popular with shareholders, raising the bid's chance for success, Leerink Partners analysts wrote in a note to investors.

Valeant CEO J. Michael Pearson

Allergan's largest shareholder, Ackman's Pershing Square Capital Management, is already on board. According to the WSJ, Ackman in February agreed to work with Valeant to pull off a buyout after a Pershing Square employee introduced him to Pearson. Valeant's chief expressed interest in Allergan, and from there, Ackman got to work buying stock. He then switched to over-the-counter call options, which helped him to accumulate his stake without attracting much notice, Bloomberg reports.

For Valeant, Allergan's allure is easy to understand. Pearson has touted eyecare and skincare--Allergan specialties--as high-growth, high-priority areas for Valeant since taking the reins in 2008. He's made acquisitions accordingly, adding dermatology companies like Medicis and Obagi Medical, and most recently inking his largest deal ever, an $8.7 billion buyout of eye giant Bausch + Lomb.

With a lineup featuring wrinkle treatment Botox and dry-eye product Restasis, Allergan would fit right in. And with a market cap of more than $40 billion, it would also vault Valeant toward Pearson's recently announced goal of becoming one of the world's top 5 largest drugmakers by 2016.

"I don't think it's any secret that a combination of Valeant and Allergan would make a lot of sense," Capital Group analyst Timothy Chiang told Bloomberg in an interview. "The question has always been, it's not whether Valeant would be interested in buying Allergan, it's a question of would Allergan sell to Valeant."

And if Allergan doesn't want to, there may not be much it can do, Leerink analysts say. Revealing pipeline surprises and completing a tax inversion are both defense plays Allergan could make--but the analysts view those as "long shots." And while other suitors could emerge, with companies like GlaxoSmithKline ($GSK), Sanofi ($SNY), Novartis ($NVS) and Nestlé potentially making good fits, few could compete with Valeant on synergies and tax benefits, they wrote.

- read the release from Valeant
- get more from the WSJ (sub. req.)
- see Bloomberg's take here and here

Special Reports: Pharma's top 10 M&A deals of 2013 - Valeant/Bausch + Lomb | The most influential people in biopharma today - J. Michael Pearson - Valeant

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