Valeant could be pushed to boost Allergan price by up to 40 per cent: analyst

MONTREAL - Valeant Pharmaceuticals International could be pushed to increase the cash component of its bid for Botox maker Allergan by up to 40 per cent, an industry analyst said Monday.

Alex Arfaei of BMO Capital Markets says California-based Allergan will undoubtedly demand a higher price and that Valeant might well agree to up its bid, noting that the Quebec-based company has flexibility as long as the deal increases earnings by at least 20 per cent and it is able to keep debt to no more than four times EBITDA.

Valeant last week proposed a hostile offer of US$48.30 in cash and 0.83 of a Valeant share for each Allergan share. The offer would be worth about US$159 a share at Valeant's trading price Monday or almost US$48 billion.

Allergan Inc. (NYSE:AGN) stockholders would own 43 per cent of the combined company.

The analyst said Valeant (TSX:VRX, NYSE:VRX) could increase the cash component by US$5.7 billion to about US$20.6 billion. That would increase the deal's value to US$54.6 billion or $178 per share, a 53 per cent premium before Valeant's partner, Pershing Square Capital Management LP, began its run to become Allergan's biggest stockholder at 9.7 per cent.

"However, we highly doubt that Valeant would have to go this high," Arfaei wrote in a report. "We believe there is a low probability for a meaningfully higher cash offer from other potential buyers; thus, Valeant's current offer may be the highest option available to Allergan's shareholders."

Valeant could then try to complete the acquisition by raising the cash component of its bid by 25 per cent to US$18.5 billion, he added. This would be about 22 per cent accretive and increase leverage to 3.4 times adjusted EBITDA.

Neil Maruoka of Canaccord Genuity, who met with Valeant executives Friday to discuss the Allergan offer, called the combination compelling but the offer price not likely large enough.

"We continue to believe that a higher premium may be required for Valeant to close this transaction," he wrote. "There appears to be a willingness on CEO Mike Pearson's part to provide a higher cash component."

He said the meeting provided him greater confidence that a deal can be completed and that US$2.7 billion in cost savings can be achieved. The Toronto-based analyst also said the likelihood of another bidder emerging was low.

"The longer it takes to get the deal done without other bidders emerging, the less compelled Valeant may be to offer a higher premium."

Allergan has responded by adopting a "poison pill" defence that will allow its board time to consider alternatives and potentially block the bid.

The company said its board unanimously adopted a one-year stockholder rights plan and declared a dividend distribution of one preferred share purchase right on each outstanding share of the company's common stock.

Under the plan, shareholders of record at the close of business on May 8 will receive one right for each share of Allergan common stock. The rights will become exercisable if a person or group acquires 10 per cent stake in the company. Rightholders other than those with the large ownership stake will be able to purchase a number of Allergan shares for $500 that have a market value of twice the exercise price of the right.

Meanwhile, media reports Monday suggested that Allergan may be preparing to make another approach at buying Irish firm Shire Plc after being rebuffed in recent months.

On the Toronto Stock Exchange, Valeant's shares closed at C$147.35, down 18 cents, and were off 22 cents at US$133.51 in New York. Allergan's shares closed down $2.15 or 1.28 per cent at US$166 on the New York Stock Exchange.

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