A $66 billion combination between Allergan Inc. (AGN) and Actavis PLC (ACT) was announced early Monday and the result is likely to be a win for activist investor Bill Ackman even if it isn't the combination the insurgent manager of Pershing Square Capital Management LP had been seeking.
Dublin, Ireland-based Actavis announced it was going to acquire Allergan for $219 a share in a deal it expects to close in the second quarter of 2015, according to a Monday statement. As part of the deal, Actavis will acquire Allergan for a combination of $129.22 in cash and 0.3683 Actavis shares for each share of Allergan common stock. The total transaction is valued at $66 billion based on Actavis' closing share price on Friday.
The deal trumps a hostile bid for the Irvine, Calif.-based target orchestrated by Canada's Valeant Pharmacueticals International Inc. (VRX) and Ackman, in a much-publicized effort that became public in April.
After Allergan rejected the deal multiple times, Valeant had suggested it could hike its unsolicited bid to at least $200 a share, up from roughly $180.50 a share. But folloing Actavis' offer, the Valeant CEO Michael Pearson said in a statement that the company could not justify to its own shareholders paying a price of $219 a share for Allergan. "We have seen the announcement that Allergan and Actavis have made, and while we will review any such agreement in determining our course of action, Valeant cannot justify to its own shareholders paying a price of $219 or more per share for Allergan," he said.
And even though Ackman and Pershing have been fighting tooth and nail to pressure Allergan into a combination with Valeant, a deal bringing together the Botox-maker and Actavis at that price will likely produce significant profits for Pershing even after factoring in the cost of lawsuits, proxy solicitors, public relations assistance and other campaign spending over the past eight months.
According to an original Schedule 13D Securities and Exchange Commission filing made by Valeant in April 2014, a fund made up mostly of shares purchased by Pershing called PS Fund 1 LLC acquired Allergan common stock in February at prices between $125 and $127 a share. It also acquired call options for Allergan shares that it acquired between March and April at prices that were triggered at between $$126 and $134 a share — all significantly less than the $219 a share acquisition price. In all, the fund acquired a 9.7% Allergan stake.
"This is a great victory for Pershing or anyone else whose interests are based on short-term stock prices," said Gary Lutin, chairman of the Shareholder Forum.
One possible downside to the transaction for Pershing Square involves a California federal court judge ruling from earlier this month. The decision may open the door for a class action lawsuit among other shareholders of Allergan who sold their stake in the days and weeks leading up to Valeant's securities disclosure on April 21 of its unsolicited offer for the company. The court left open the issue of whether violations occurred prior to the announcement of the Valeant bid and presumably leaves Pershing Square and Valeant open to other potential claims from Allergan shareholders. "Whether it was insider trading or not, the structure of the acquisition was manipulative even if it was legal," said one observer. "However, even with the potential for class action lawsuits against Allergan it seems like it was a justifiable risk from Pershing's point of view when considering the kind of money they are making."
In anticipation of the possible Actavis-Allergan combination, Pershing Square appeared to have launched another campaign that could assist Valeant now that it has lost its Allergan bid. On Nov. 12, Ackman and another fund launched an activist campaign at animal health care company Zoetis Inc. (ZTS) in an effort that could eventually push the animal health-care company to sell itself. That campaign was launched alongside a new fund run by ex-Pershing lieutenant Scott Ferguson, Sachem Head Capital Management LP — the two funds own a 10% stake in Zoetis.
In response to the activists, the Florham Park, N.J.-based company on Friday said that it was adopting a one-year poison pill with a 15% threshold.
The Zoetis endeavor comes after Valeant's Pearson suggested in the drug company's fourth quarter 2013 earnings call that animal health care "continues to be an area of interest." Pearson added that "obviously we have to find an asset at the right price…"
However, Zoetis on Monday announced it was acquiring assets from Abbott Animal Health for $255 million in a deal that could complicate Pershing's insurgency there and raises questions about whether Valeant would still be interested in buying the asset.
"The addition of Abbott Animal Health assets is an excellent complement to the Zoetis companion animal business and addresses the challenges our customers face today in effectively raising and caring for animals that are living longer and receiving more intensive medical and surgical treatment," said Zoetis Chief Executive Officer Juan Ramón Alaix.
Zoetis has an investor day on Tuesday, where observers are likely to get more information about the company's take on Pershing's effort there.