Ackman’s Pershing Amassed Allergan Stake Under Radar

Apr 22, 2014 1:42 pm ET

(Updates with Ubben’s comments from 17th paragraph.)

April 22 (Bloomberg) -- Bill Ackman’s Pershing Square Capital Management LP amassed almost 10 percent of Allergan Inc. in less than two months without raising many eyebrows at the Botox-maker he’s now targeting in a hostile takeover bid.

Now, Ackman’s activist hedge fund has partnered with serial acquirer Valeant Pharmaceuticals International Inc. to buy Allergan for about $46 billion in a cash-and-stock deal. The goal is to reap savings by joining the companies’ skin- and eye- care businesses.

Ackman began buying Allergan stock Feb. 25 and then in March switched to over-the-counter call options to accumulate his stake, regulatory filings show. A buying pause April 9 and 10 helped lower the price, before Ackman resumed in earnest April 11, according to two people familiar with the matter.

Valeant was interested in the unusual arrangement with Ackman because the hedge fund could amass more of Allergan’s shares before making a public disclosure, said a person familiar with the matter. The shares rallied the most since 2009 in the six days before the stake and bid were disclosed yesterday, soaring 22 percent, and trading volume last week approached the highest level in a year.

U.S. securities law “allows a company like Pershing to get a running start as there is not disclosure of the intent to take over a firm” until 10 days after acquiring more than 5 percent of the target’s shares, said James Cox, a professor at Duke University School of Law.

Voracious Acquirer

Ackman is partnering with a voracious acquirer in Valeant Chief Executive Officer Mike Pearson, who took the helm at the Laval, Quebec-based company in 2008 and has since spent at least $19 billion buying more than 35 companies.

Valeant today offered $48.3 in cash and 0.83 of its shares for each Allergan share, in a deal valued at $45.7 billion based on yesterday’s closing price. Allergan gained more than 16 percent to $164.95 as of 1:27 p.m. in New York, giving it a market value of $49 billion.

“We firmly believe that combining Valeant and Allergan would create an unrivaled platform for growth and value creation in health care, and we look forward to finalizing and announcing the terms of our proposal shortly,” Valeant said in an e-mail.

Pershing Square supports the offer, Valeant said in a statement, and will elect to accept Valeant’s stock in the deal, becoming a shareholder of the combined company.

Spending Spree

Rather than spend what Pearson says can be billions of dollars developing drugs from scratch, he buys companies with existing products, such as Bausch & Lomb for $8.7 billion last year, his biggest acquisition to date. That spending spree has left Valeant with debt of about $17 billion, according to data compiled by Bloomberg -- another reason a partnership on a deal this big makes sense.

“These guys are all finding out that they have to do different approaches because sometimes all that public information doesn’t help their cause, they wind up paying more for a company,” said Carlo Panaccione, co-founder of Navigation Group in Redwood Shores, California, who oversees around $375 million. Alliances like this may help deals “without having to necessarily show your hand too early.”

Almost 24 million Allergan shares changed hands last week, the most since June, according to data compiled by Bloomberg. The stock was up 28 percent this year through yesterday, the ninth-best performer in the Standard & Poor’s 500 Index. Ackman spent about $76 million on Allergan shares in late February, according to a regulatory filing. He then bought about $3 billion in over-the-counter calls in March and April.

Larger Deal

Pearson reiterated in a Bloomberg interview last month that he could do a deal in 2014 comparable to Bausch & Lomb, after telegraphing his intention to do a larger deal at a Goldman Sachs Group Inc. conference in January.

Last year, Valeant tried unsuccessfully to acquire Actavis Plc, Bloomberg reported. In February, Actavis agreed to buy Forest Laboratories Inc. in a $25 billion deal, as other pharmaceutical companies race to gain scale and add products by acquiring rivals.

Valeant itself was earlier successfully targeted by activist investment fund ValueAct Holdings LP, and the firm’s president, Mason Morfit, joined the company’s board.

Higher Returns

Valeant was pursuing long-shot disease cures when ValueAct invested in 2007. Morfit helped convince the board to turn to less sexy, higher-return branded generics and recruit Pearson as its CEO, with overhauled compensation practices that reward shareholder outperformance. Valeant has since grown into a $42 billion drugmaker from a $1.4 billion company.

Morfit is leaving Valeant’s board and was not included in the proxy statement issued today, ValueAct CEO Jeff Ubben said on the sidelines of a conference in New York.

Ackman structured the Allergan-Valeant deal and approached Valeant with the idea, Ubben told reporters today. Making the takeover bid with Ackman’s 10 percent stake gives Valeant “a running start on the vote, and a bit of a block position,” Ubben said.

Valeant had for more than a year been seeking a friendly deal with Allergan, Ubben said. Valeant made “overtures” to Allergen for more than 18 months, according to its statement.

Pearson also bought two companies last year that sold themselves amid pressure from another activist investor. Voce Capital Management LLC, a San Francisco investment fund, sent letters to management of both Obaji Medical Products Inc. and Solta Medical Inc. urging them to seek buyers. Valeant snapped up Obaji in March 2013 for $376 million and Solta in December for $263 million.

Allergan confirmed in a separate statement today that it received an unsoliticed takeover proposal from Valeant.

--With assistance from Gerrit De Vynck in Toronto.