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Allergan Doesn't Accept Ackman's $600 Million Gift

Updated from 9:01 a.m. ET to include Valeant statement, analyst comments

NEW YORK (TheStreet) -- Allergan (AGN - Get Report) has decided not to engage with Pershing Square's Bill Ackman and Valeant Pharmaceuticals (VRX - Get Report) just two weeks after the hedge funder decided to fork over $600 million to investors as part of his takeover effort.

The botox-treatment specialist said on Tuesday its board has unanimously rejected Ackman and Valeant's takeover offer, which included 0.83 of Valeant common shares, $72.00 in cash per share of common stock and a contingent value right related to DARPin sales.

"Valeant's revised proposal substantially undervalues Allergan, creates significant risks and uncertainties for Allergan's stockholders and does not reflect the Company's financial strength, future revenue and earnings growth or industry-leading R&D," David E.I. Pyott, Allergan's chairman of the board and chief executive officer, said in a Tuesday statement.

Pyott also said he believes investors are confident in Allergan's growth prospects and are willing to continue investing in the company as a standalone. On May 12, Allergan forecast it would generate double-digit sales growth and 20% compound earnings-per-share growth over the next five years, in addition to approximately $14 billion in additional free cash flow during that time span.

"The Board is confident that the Company will create significantly more value for stockholders than Valeant's proposal. We look forward to updating stockholders on or around the time of our second quarter earnings announcement," Pyott concluded.

In rejecting Ackman and Valeant's latest offer, Allergan reiterated its belief that Valeant's business model is unsustainable, has low organic growth, is over-leveraged, and relies too heavily upon acquisitions for growth.

Allergan shares were little changed at $163.80, while Valeant shares were falling over 1% to $124.99. Year-to-date, Allergan has risen over 47%, mostly as a result of Ackman and Valeant's takeover interest.

"Rather than discussing the benefits of the proposed combination with Valeant, Allergan's Board continues to throw out innacurate and misleading statements about Valeant and is recycling the same unsupported arguments about Valeant that have already been addressed, leaving us no choice but to take our offer directly to shareholders," Laurie Little, Valeant's VP of Investor Relations, said in an e-mailed statement.

Ackman's Smart Move Rebuffed

Ackman's decision in late May to give $600 million to Allergan shareholders in a revised proposal with Valeant to buy the company looked like a smart move. It allowed Valeant to effectively improve on its takeover offer and could have been enough to bring all parties to the negotiating table.

It also underscored Ackman's confidence in the strategic merit of Valeant's play for Allergan.

As part of a revised offer, Ackman agreed to taking only Valeant stock for Pershing's 9.7% holding of Allergan shares, in addition to a lower price in the cash and stock deal. That offer meant Pershing Square wouldn't receive a dime of cash for a significant time after the prospective deal closes.

Pershing also wouldn't benefit from Allergan's rising takeover price if a sweepstakes emerged.

Were a deal to close under the terms of Ackman and Valeant's latest offer, Allergan shareholders would receive $179.25 a share in cash and stock, with $72 a share of the consideration coming in cash and the rest in Valeant stock. Ackman, by contrast, would only receive $158.50 for his Allergan shares and all in stock.

A Line in the Sand?

Perhaps now that Allergan's board has formally rejected what appeared to be Ackman and Valeant's best offer, it will be time for investors to decide whom to support.

Ackman has made no secret he is willing to take his offer directly to Allergan shareholders and the company's strong stock gains in 2014 present tangible proof that there is value in it. Allergan, by contrast, appears confident that investors are on the company's side and won't be enticed by Ackman and Valeant's cash and stock deal.

Analysts at Buckingham Research Group said in a Tuesday report Allergan could look to M&A or share repurchases to support its stock price and provide a real alternative to Valeant's offer. Similarly, Wells Fargo analysts pointed to Allergan's forthcoming guidance on a second quarter earnings and insight into the value of assets in the company's DARPin pipeline call as a possible positive for the company's shares.

What is clear is that after multiple bids, hour-long conference calls and a flurry of press on both sides of a deal, this takeover effort is just heating up.

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-- Written by Antoine Gara in New York.

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