Wednesday, May 28, 2014

Valeant vs Allergan: Street Unimpressed by Bigger Offer

 Valeant Pharmaceuticals (VRX) has revised its offer to buy Botox-maker Allergan (AGN), upping the size of the overall deal, as well as the cash component. Wall Street, however, isn’t rejoicing.

Shares of Allergan fell 4.2% in morning market action to $158 a share, while Valeant fell 3.3% to $125.65 a share. That's quite a changeover pace from the kick both stocks received last month when Valeant and hedge fund manager Bill Ackman unveiled their alliance to purchase Allergan in a stock and cash deal worth $46 billion.

Today's bid is worth $49.5 billion, an increase of 8.5% over its previous offer. But at roughly $166.16 per share, it's below the $185 to $200 per share expected by Stern Agee's Shibani Malhotra in a note published yesterday.

Valeant's; new offer includes $58.30 per share in cash. Still, the deal still has a very large stock component. Allergan's board said it "would carefully review and consider" the bid.

In a report published this morning, Credit Suisse writes that Valeant's offer "is better, but may not be compelling enough given AGN’s strong standalone outlook…Given that the majority of the offer would still be in VRX stock, how one values VRX stock goes a long way to determining the true value of the deal."

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In a nod to investors' worry that Valeant would gut Allergan's R&D pipeline, the drug maker is proposing a contingent-value right potentially worth up to $25 a share for the vision-loss drug DARPin, and the company pledged to continue investing to develop the product.

Still, many analysts still argue that Allergan can go it alone. Buckingham Research Group's David Buck writes:

Given the still high stock component of proposed transaction, effectively a bet on a rising Valeant share price, it is unclear that this proposed transaction can match Allergan standalone's options.

Credit Suisse's Vamil Divan writes:

We still believe that AGN has several ways that they can boost standalone value of the firm, if not possibly fending off VRX completely. Strong base business and balance sheet leave AGN many options and we see them being more proactive in the face of VRX’s bid.

And Aaron Gal at Bernstein Research writes:

Not impressive…The offer continues to under-estimate Allergan value as stand-alone entity. As we noted previously, Allergan has recently increased its earnings expectations for 2014 (mid-point 5.69). It projects 2015 YoY EPS growth to 20-25% and 20% EPS CAGR for the following four years. As the putative Valeant deal will close after 1/1/2015, most investors will compare the Valeant deal to AGN value on a 2016 basis. This suggests value range of $167 to $184 as a stand-alone company (20x-22x ’16 EPS of $8.36). Thus, at the current VRX stock price, the current offer is inferior to AGN on a standalone basis. Further, even if the Valeant multiple was to expand to 12.5x its guidance for 2015 post-deal EPS of $12.74, the value of the offer is $190, not have much in the way of a control premium. Σ We think Valeant is expecting Allergan shareholders will continue to believe the stock will decline to its pre offer range ($120-$130) if the offer was not to materialize. This is, in our view, unlikely. Given the new guidance, the stock may decline to $140 (20x 2015) but is then likely to rebound immediately afterwards. We hoped for something more imaginative, like substantially altering the share of cash and stock Valeant will use or a more substantial increase in the value offer ($30) or $9B, which is one year’s worth of the combined company EBITDA.

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