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By Caroline Humer and Svea Herbst-Bayliss
NEW YORK/BOSTON Aug 20 A few months ago, an
innovative partnership between Valeant Pharmaceuticals
and billionaire investor William Ackman to buy Botox maker
Allergan Inc looked like a blueprint for success. Now
some Valeant shareholders who backed the deal at its start are
questioning whether it will become reality.
A robust defense from California-based Allergan and
Valeant's own weak second quarter financial performance have
pressured Valeant stock, which is down 6 percent this year after
doubling in 2013. Ackman, whose hedge fund Pershing Square
Capital Management owns nearly 10 percent of Allergan, is
digging in and told his own investors he is focused on getting a
deal done. Valeant also remains committed.
Allergan's resistance -- the company has rejected Valeant's
overtures and instead been looking for a partner while also
trying to cut costs -- is an unexpected twist for Valeant, whose
steady stream of drug industry acquisitions under Chief
Executive Michael Pearson drew frequent investor praise.
Valeant's novel strategy to team up with Ackman and his
hedge fund, also was lauded. One of Valeant's top shareholders,
ValueAct Capital, called Valeant and Allergan a "perfect match"
when the plan was announced in late April.
Now the value of Valeant's cash and stock-based offer has
fallen $5 billion to $48 billion.
ValueAct is the first large shareholder to have expressed
concerns about the deal publicly, telling Reuters last week that
Canada-based Valeant doesn't need to buy Allergan and that it
may do better by considering other acquisition targets if the
battle drags out.
In Reuters interviews since then, five other large Valeant
shareholders, most of whom support the deal, said that there
were mounting doubts, ranging from concern a transaction
wouldn't happen to worries that the pursuit of Allergan would
drag out so long as to undermine the benefits.
"The dive in the stock price does make it difficult to
pursue Allergan and others," said Valeant investor Gautam
Dhingra, CEO of High Pointe Capital Management, which owned
18,600 shares as of June 30.
Dhingra said he still believes in Valeant's business model
of acquiring companies and cutting research & development costs,
although people are starting to challenge it. "Until now there
has been no flaw in the model, nobody has questioned it," he
Another investor at a Canadian investment fund said that six
months or a year of pursuing Allergan would not be too long, but
that by early next year, he would like the deal to be moving
forward. "If the opportunity cost is too much over time, we
think there are other things that Valeant can do."
During the second quarter 57 fund firms exited Valeant stock
completely and 148 funds cut their positions, according to data
from the Securities and Exchange Commission.
Mutual fund giant Fidelity Investments cut its Valeant
holdings by 38 percent while a number of hedge
funds including Robert Citrone's Discovery Capital Management
and Daniel Loeb's Third Point LLC as well as Adage Capital
Management, sold out completely, according to the filings.
"The share price had gone up a lot and when things started to
look a little more difficult, many investors were not ready to
stick around and wait for that little extra percent they might
make if and when the deal is consummated," one shareholder at a
New York hedge fund said.
Erik Gordon, a professor of law and business at the
University of Michigan, said that in April he saw a
"transformational deal" between an activist investor and a
company that wanted to buy another company. "Now with all of
these complications cropping up, I'm not sure anymore," he said.
Still, 81 funds opened new positions and 191 added to their
Valeant holdings in the quarter. Steven A. Cohen's family office
Point72 Asset Management, the successor to hedge fund titan SAC
Capital Advisors, added a new position as did Eminence Capital
and Senator Investment Group, the filings show.
Ackman and Valeant both stressed their commitment to
completing a deal. The partners are working to gather the
support of owners of 25 percent of Allergan stock, the level
needed to call a special meeting. Ackman holds 9.7 percent.
Proxy advisory firms have suggested investors vote for the
meeting, at which Ackman and Valeant want to replace the bulk of
Allergan's directors. They also want Allergan shareholders to
vote for opening discussions on a deal. There is no vote on a
deal yet, making it premature for proxy firms to issue any
Allergan has been fighting hard to keep Valeant at bay, from
suing its pursuer to looking for its own potential acquisitions,
which would complicate a Valeant deal.
Ackman and Valeant began working together in February.
Ackman used a corporate entity, funded by the hedge fund and
Valeant, to amass an Allergan stake. Pershing Square in turn
booked about $1 billion in profit as Allergan shares shot up on
the deal announcement.
Allergan said the arrangement between Ackman and Valeant
violated insider trading rules and sued. Valeant and Ackman deny
those claims, with Ackman calling the lawsuit a tactic to delay
a special shareholder meeting.
The Securities and Exchange Commission is asking questions
about the proposed deal, a source familiar with the matter said
last week, and Valeant disclosed earlier this month a new
Internal Revenue Service audit of the its U.S. consolidated
group for its 2011 and 2012 tax years.
A Valeant spokeswoman said that the company remains
committed to both the deal and its promises of growth, and that
it was confident in the legality of its actions with Ackman.
"Valeant also has a rich pipeline of other business
development opportunities, and we are confident that we will
continue to deliver strong results and grow in the high single
digits," Valeant spokeswoman Laurie Little said in an emailed
(Additional reporting by Rod Nickel in Winnipeg, Manitoba;
Editing by Michele Gershberg and Peter Henderson)