Valeant acquisition of Allergan would create a specialty pharma powerhouse, says Paradigm

On Tuesday, Valeant announced that with the help of noted hedge fund manager Bill Ackman, it was launching a hostile cash and share bid for Allergan, maker of Botox.The combination of Valeant Pharmaceuticals (TSX:VRX) and Allergan would be beneficial for Valeant shareholders, says Paradigm Capital analyst Alan Ridgeway.

On Tuesday, Valeant announced that with the help of noted hedge fund manager Bill Ackman, it was launching a hostile cash and share bid for Allergan, maker of Botox. Ackman’s Pershing Square Capital Management has scooped up nearly 10% of Allergan in recent weeks. Valeant said it would tender $48.30 in Cash and 0.83 shares of Valeant for each Allergan share.

Valeant said it expected to realize “at least” $2.7-billion in annual cost synergies, 80% of which would happen in the first six months following the deal. CEO Michael Pearson characterized the deal.

“This proposal represents an undeniable opportunity to create extraordinary value for both Allergan and Valeant shareholders by establishing an unrivaled platform with leading positions in ophthalmology, dermatology, aesthetics, dental and the emerging markets” he said. “Together, we can capitalize on the inherent strengths and complementary portfolios of our two companies, while achieving significant synergies by applying Valeant’s unique operating model to a combined set of assets. While the Allergan CEO and Board of Directors made it clear, both privately and publicly, that they were unwilling to enter discussions with us about creating a value-enhancing combination, we are hopeful that our proposal for this extremely compelling combination will enable us to engage in productive discussions.”

Ridgeway says the combination of Valeant and Allergan would “create a global specialty pharma powerhouse”. The Paradigm analyst says a deal would be “highly accretive” for Valeant and would likely lead to a re-rating of the stock, though he says he is sitting tight for the moment because the outcome of the potential deal is still very uncertain.

In a research update to clients this morning, Ridgeway maintained his “Buy” rating and $175.00 one-year target on Valeant. This target, he explains, is based on 20x his 2014 cash EPS estimate of $8.78.

Shares of Valeant Pharmaceuticals on the TSX closed today down 1.6% to $133.27.

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