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By Caroline Humer and Deena Beasley
NEW YORK and LOS ANGELES, July 1 Allergan Inc
may take on debt to buy back its own shares as part of a
multi-faceted plan to thwart a $53 billion takeover bid by
Valeant Pharmaceuticals International Inc and
activist investor William Ackman.
The company is also considering making acquisitions of its
own and more spending cuts to increase shareholder value, Chief
Executive David Pyott said in an interview, outlining steps to
build support for Allergan, best known for its Botox
anti-wrinkle injections, to remain a standalone company.
But Allergan, which is expected to unveil the plan when it
releases second-quarter results sometime in July, faces an
Valeant says it already has enough shareholders on its side
to call a special meeting to replace Allergan board members with
nominees who support its takeover proposal. To call a meeting,
the acquisitive Canadian company needs support of the holders of
at least 25 percent of the shares.
It is possible that Allergan can turn the tide, but it won't
be easy, said Ronny Gal, an analyst at Sanford C. Bernstein.
"When I run my numbers, a buyback alone doesn't quite cut
it," Gal said. "A buyback plus another round of costs cuts, or
the acceleration of the discussed cost savings, does."
An Allergan acquisition could help as well if it increases
the company's profits, Gal said. In order to get near-term
investors on its side, Allergan needs to deliver another $10 per
share of value in 2015 or $11 per share in 2016, he said.
"The question is, how big of a buyback and how big are the
cost cuts?" he said.
Allergan announced an initial round of spending cuts in May
when it first rejected Valeant's offer. When it rejected
Valeant's offer again on June 10, it said that it would unveil
more cuts and capital measures when it releases its
In the interview, Allergan CEO Pyott was more specific.
Pyott has met with investors to talk about the company's
defense, which he said could include issuing new debt to buy
back shares. He said Allergan could borrow up to $10 billion
without affecting its investment-grade rating, but he did not
say how much the company might spend on the buybacks.
"Our goal now is to give them most of what they want," Pyott
said, referring to Allergan shareholders.
A leveraged buyback would increase the amount of Allergan's
debt, making its balance sheet less attractive to a would-be
acquirer. Allergan currently has little debt, one of the company
features that appeals to debt-laden Valeant.
A buyback would also reduce the number of shares outstanding,
which would raise its earnings per share and increase
shareholder value. An acquisition by Allergan could also
increase earnings, he said.
THE VALEANT PLAN
Valeant Chief Executive Michael Pearson said in an interview
last week that he believes Valeant and Ackman, who owns nearly
10 percent of Allergan through Pershing Square Capital
Management, have the backing of enough Allergan shareholders to
support the deal.
According to sources, Valeant and Ackman have won over a
prominent hedge fund, Paulson & Co., which has bought more than
6 million Allergan shares.
The company has said it will cut about $2.7 billion in
spending at Allergan and that it would rely less on internal
research and development in the future. Allergan says that such
cuts would limit the company's growth potential.
Valeant also might pay more to get a deal done, Pearson
said. Valeant has already raised its offer twice but has held
firm now for about a month.
"We have a walk away price for Allergan. I can't tell you
what our walk-away price is, but right now we don't have any
reason to raise because we would be bidding against ourselves,"
The offer, which includes $72 in cash plus 0.83 of a Valeant
share, is currently worth about $177 per share, or $53 billion.
The deal value is calculated based on 303.5 million diluted
shares outstanding as of March 31, and Ackman's holding of
(Additional reporting by Rod Nickel in Winnipeg, Manitoba and
Olivia Oran in New York; Editing by Frank McGurty and Sofina