Valeant Pharmaceuticals International Inc (VRX.TO) said on Tuesday it will sweeten its unsolicited $47 billion offer for drugmaker Allergan Inc (AGN.N), and activist shareholder Pershing Square Capital Management said it would ask for a non-binding vote to pressure Allergan to the negotiating table.
The moves by Valeant and Allergan's biggest shareholder, Pershing, which is led by Bill Ackman, come a day after California-based Allergan rejected Valeant's current offer and criticized its business model, which is based on a steady pace of acquisitions.
Canada's Valeant said it would change its cash and stock offer during a May 28 webcast in which it will discuss details of its plans for Allergan's business. Valeant said it remained committed to getting the deal done, but would remain "financially disciplined.
"We will not stop our pursuit of this combination until we hear directly from Allergan shareholders that you prefer Allergan's 'stay the course plan' to a combination with Valeant," Valeant Chief Executive Michael Pearson said on Tuesday in a letter to shareholders.
In documents filed with the Securities and Exchange Commission, Pershing Square, which owns a nearly 10 percent stake in Allergan, said it would ask shareholders to attend a meeting and vote on compelling the board to engage in discussions with Valeant. The vote on an undisclosed date would be non-binding, and the meeting is not called according to Allergan's bylaws.
Allergan, which makes the popular anti-wrinkle treatment Botox, slammed the move as "a self-serving exercise by Pershing Square to further Valeant's attempt to acquire Allergan" at an undervalued price.
"It's pretty creative (but) I suspect it will have no effect," said Erik Gordon, professor at the University of Michigan's Ross School of Business of Pershing's move. "What makes the change is when the big holders say (to the board or management), 'hey why don't you at least come and talk to this guy?' This is like takeover theater."
Allergan said on Monday that Valeant's business model was unsustainable and the offer was too risky because of uncertainty about the company's long-term growth.
Valeant's signal of an improved offer near the end of the month sets up an intense two-week period for the two sides to sway shareholders, some of whom own stock in each company.
Allergan shares were up 1.1 percent to $161.46 in New York by mid-afternoon, while Valeant stock crept up 0.1 percent to $142.17.
Valeant, backed by Pershing, offered on April 22 to pay $48.30 a share in cash and 0.83 of its common share for each Allergan share. Valeant can improve the cash component of the offer by 41 percent to $68 per share, which, combined with the original stock component, would value Allergan at $54 billion or $176 per share, BMO Capital Markets analyst Alex Arfaei said in a note.
An offer with more cash might reduce perceptions of risk associated with Valeant's fast-moving stock. But Valeant is also mindful of how leveraged it is after years of brisk buying.
It has set a goal of reducing this year its ratio of net debt to adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) to below four times. The ratio was around 4.5 times in January, and acquiring Allergan under the existing terms would reduce it to about three times, Valeant has said.
Valeant's pursuit of Allergan is part of its strategy to become one of the five-biggest drug companies by market capitalization by the end of 2016. The pharmaceutical industry might see the busiest pace of acquisitions since last decade, led by Pfizer Inc's (PFE.N) $106 billion offer for AstraZeneca (AZN.L).
Following Valeant's offer last month, Allergan put in a so-called "poison pill" to slow Ackman from increasing his nearly 10 percent stake in Allergan.
Valeant said at that time it planned to cut costs at Allergan by about $2.7 billion, including in research and development.