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Summary

  • Allergan might acquire Salix according to "people familiar with the matter". Allergan might possibly get a tax inversion by buying Salix. Or it could make it all-cash without an inversion.
  • Valeant's tender fiasco means that Allergan shareholders should approve any deal. Despite Valeant's aggressive claims, just 4% of Allergan shares were tendered in two months.
  • Chairman of Salix is 70 years old and the CEO and President is 65. This is a great way for them to retire.
  • Salix went up 15% today due to the acquisition rumor. It is not certain that Salix is the one Allergan will acquire.
  • The WSJ article (i.e. "people familiar with the matter") also says Allergan might acquire "another unknown party" if not Salix.

Getting a tax inversion or not?

There is a rumor that Salix Pharmaceuticals (NASDAQ:SLXP) or "another unknown party" might get acquired by Allergan (NYSE:AGN). Allergan can afford to pay all-cash and that would be far more beneficial to its EPS than an all-stock deal. On the other hand, an inversion would require an all-stock deal. An inversion would be a slower process because it would require a shareholder vote and would need to happen after Salix closes its Cosmo acquisition.

If I were an Allergan shareholder, I would want an all-cash deal because it would be highly accretive.

Salix Pharmaceuticals announced last month that it was going to get a tax inversion by acquiring a subsidiary of Cosmo Pharmaceuticals (COPN). Salix has 63 million shares outstanding and will issue 19 million new shares for Cosmo. After Salix acquires the Cosmo subsidiary, there would be 82 million Salix shares outstanding.

Allergan has 298 million shares outstanding. If Allergan issues one Allergan share for every Salix share, we get to 298 + 82 = 380 million shares. Salix shareholders would then be owning 82/380 = 21.5% of the combined company. Thus, Allergan would meet the requirement for a tax inversion that the shareholders of the company getting acquired should own at least 20% of the combined company.

Allergan could supplement this with a share buyback after such an acquisition. That would eat up some of the shares being issued.

The Salix Chairman is 70 years old and the CEO and President is 65. This is a great way to retire.

I don't fear any government roadblocks to tax inversions in the near term: I wrote an article about this last week titled "Why Tax Inversions Won't Go Away".

Note that the Wall Street Journal article that broke the story on Salix also said that Allergan could strike a deal with "another unknown party." So it is by no means certain that Salix is going to be the one. I don't know whether there are any legal issues because it will take a while before Salix closes the Cosmo deal.

Ackman's threat to sue

On CNBC, Ackman had threatened to sue Allergan if Allergan made an acquisition. But this was before Allergan sued him for insider trading.

If Ackman wants to sue, he would have to tell the judge a Jekyll and Hyde story:

Jekyll: Don't punish me for insider trading because I am a co-acquirer with Valeant Pharmaceuticals (NYSE:VRX) (i.e. by creating a shell company)

Hyde: I want to sue Allergan because I am an Allergan shareholder

Since judges don't like such Jekyll & Hyde characters, I think Ackman would have to make a choice between the two. Ackman would undoubtedly choose not to sue.

Tender offer fiasco

Any acquisition that would require issuing 20% of outstanding shares would need a shareholder vote, which means a tax inversion would need a shareholder vote. Earlier, due to Valeant's claims of shareholder support, it was uncertain whether such a vote would go in favor of Allergan.

But with the disastrous result of the tender offer wherein only 4% of Allergan shares were tendered, in my opinion Valeant and Ackman were bluffing when they claimed shareholder support. I believe they were bluffing in order to attract arbs to their cause.

Despite their shell company's 9.7% stake, Valeant and Ackman continue to struggle to gather the 25% of shareholder votes for a special meeting.

On top of this, the 13-F filings for Q2 showed that hardly any Allergan shares were purchased by hedge funds. Due to all these factors, Allergan should easily get shareholder approval for a tax inversion.

One of the issues in Allergan's lawsuit is that Valeant violated Rule 14a-9 by misleading shareholders about the extent of Allergan shareholder support for Valeant. I think the tender offer fiasco would support Allergan's argument.

Update to previous article

This article qualifies as an update to my previous article, in which I had said this:

Allergan's CEO looks set to make an acquisition. I haven't seen him this open-minded and aggressive about acquisitions before... Allergan's CEO sounded far more confident in Allergan's Q2 earnings call about making acquisitions than he has in the past. In the past, he would say things like tax inversions were not a priority and that strategic fit was the priority... Given how cautious and conservative Allergan's CEO is, I suspect he must be close to bagging a deal.

Funny Ackman quote

I thought this was funny. Ackman said this in the same CNBC transcript linked above:

By The Way, Berkshire Hathaway Is A Rollup.

Source: Update: Allergan Might Acquire Salix Pharmaceuticals Or Someone Else