Junk Euphoria Backs Ackman’s Allergan Dreams: Corporate Finance

Jul 24, 2014 8:31 am ET

July 24 (Bloomberg) -- While hedge-fund manager Bill Ackman has repeatedly failed to persuade Allergan Inc. to sell itself, that hasn’t stopped Wall Street bankers from lining up to fund a potential deal with more than $20 billion of junk debt.

Banks including Barclays Plc and Royal Bank of Canada raised loan commitments to $8 billion from $7 billion and pledged to arrange $12.4 billion of high-yield bonds to finance Valeant Pharmaceuticals International Inc.’s unsolicited $54 billion bid, a filing showed yesterday. The bank debt includes a $5 billion term loan, which would be the biggest of its kind backing a takeover this year, data compiled by Bloomberg show.

The commitments reflect how unprecedented demand for high- yield, high-risk debt has made it easy for a junk-rated borrower such as Valeant to finance an acquisition that exceeds the combined value of all other takeovers it’s ever attempted. Ackman, whose Pershing Square Capital Management LP is Allergan’s biggest shareholder, is using the easy money provided by the credit markets as leverage to encourage other investors to take the deal while they can.

“The Street seems to really like these guys,” Mark McCabe, an analyst with KDP Investment Advisors Inc., said in a telephone interview.

Valeant Leverage

Valeant’s debt level relative to earnings wouldn’t change “materially” after acquiring Allergan, David Kaplan, an analyst with Standard & Poor’s, said in a phone interview. Leverage would remain between 4 times and 5 times the combined companies’ earnings before interest, taxes, depreciation and amortization, he said.

S&P gives Valeant a speculative-grade rating of BB-, while Allergan has an A+ investment-grade ranking. Allergan reported $985.1 million of net income last year, while Valeant had an $866.1 million loss, data compiled by Bloomberg show.

“They’d be getting a lot of earnings from Allergan, which is a pretty profitable company,” said Kaplan.

Laurie Little, a spokeswoman for Valeant, didn’t immediately return an e-mail and phone message seeking comment. Bonnie Jacobs, a spokeswoman for Allergan, declined to comment. Fran McGill, a spokesman for Pershing Square who works for Rubenstein Associates Inc., declined to comment on the financing.

Valeant is offering $72 in cash and 0.83 a share for each share for Allergan, after twice boosting its bid for the Botox maker. An initial bid for $48.30 a share was rejected in May.

Job Cuts

To counter, Allergan said July 21 it would cut 1,500 jobs and may use the savings for an acquisition of its own.

“Allergan is going to do what they can to prevent this deal from happening,” McCabe said. The Irvine, California-based company could also take on debt to buy back shares and push up the price of its stock, he said.

Banks that provided financing commitments for the Valeant deal include Bank of Tokyo-Mitsubishi UFJ Ltd., Deutsche Bank AG, Norway’s DNB ASA, HSBC Holdings Plc and Morgan Stanley, according to the filing yesterday.

The $8 billion of term obligations consist of a $5 billion term loan B, a $1 billion term loan A and a $2 billion portion that will be denominated in euros, the filing shows.

The so-called term loan B, which is typically sold to institutional investors such as mutual funds and collateralized loan obligations, was increased from $4.25 billion. The term loan A, mainly held by banks, was boosted from $750 million, according to a June 18 filing.

Institutional Loans

Banks have sold $344 billion of U.S. institutional loans this year, compared with a record $695 billion in all of 2013, Bloomberg data show.

Interest rate margins for new loans sold to institutional investors averaged 4.09 percentage points more than lending benchmarks on July 17, rising from 3.29 percentage points in June, according to Standard & Poor’s Capital IQ Leveraged Commentary & Data.

Ackman, whose Pershing Square took a 9.7 percent stake in Allergan to drive the deal, said last week that financing commitments “don’t last forever” and that the bullish conditions in the credit markets could “change effectively overnight.”

Valeant Chief Executive Officer Michael Pearson has spent at least $19 billion buying more than 40 companies since he took the helm in 2008 as he aims to make Valeant one of the world’s five biggest drugmakers by the end of 2016.

‘Very Generous’

The Laval, Quebec-based company has a successful track record making acquisitions and cutting costs to boost profitability, according to KDP’s McCabe.

Valeant invests a smaller percentage of its revenue in research and development than Allergan, relying on acquisitions to fund growth, according to S&P’s Kaplan.

“Allergan is very generous in its R&D investments,” which represent about 17 percent of revenue, compared with just 3 percent for Valeant. “The big question is whether Valeant’s strategy is going to sustain itself over the longer term,” he said.

Valeant’s stock rose 1.7 percent yesterday to close at $124.62. The shares increased 96 percent in 2013.

“They’re excellent cost-cutters,” said McCabe. “They improve the margin of the companies they buy.”