Allergan Should Buy Perrigo For A Tax Inversion; Before Someone Else Does

| About: Perrigo Company (PRGO)

Summary

AbbVie is placing a fourth bid for Shire. If AbbVie buys Shire, Perrigo is the only company left that is large enough for Allergan's tax inversion.

Perrigo is undervalued compared to Shire. It trades at about 18 times my earnings estimate for the next 12 months. Perrigo has durable competitive advantages unlike any other pharma.

The combined company could retain both the CEOs of Allergan and Perrigo since they know those businesses best (maybe Chairman and CEO respectively). They are both very good CEOs.

Introduction

Today, we learnt that AbbVie's (ABBV) third offer for Shire (NASDAQ:SHPG) at a premium of 46% to Shire's original price had been rejected. AbbVie is also planning a fourth and higher bid that it will place before Shire's shareholders. This also led to a spike in Valeant's (NYSE:VRX) stock price because it makes it harder for Allergan to buy Shire and get a tax inversion.

Perrigo is undervalued

My estimate for Perrigo Company's (NASDAQ:PRGO) earnings for the next 12 months is around $8 (see this article for details). That means Perrigo trades for about 18 times earnings (Perrigo's fiscal year ends in June). AbbVie's bid for Shire was around 25 times forward earnings.

Perrigo's earnings next year will jump due to the increase in Tysabri royalty from 12% to 18%, and the full year effect of the Tysabri royalty and the lowered tax rate.

Allergan's tax inversion

Perrigo is the only company left that is large enough for Allergan's (NYSE:AGN) tax inversion. Buying Perrigo would also be the best decision financially. It is trading significantly below its 52-week high because it missed earnings expectations in its latest quarter. The miss was due to temporary issues like a weak flu season and a weak flea/tick season.

Allergan should buy Perrigo instead of getting into a bidding war over Shire. AbbVie is much bigger than Allergan. Allergan should not waste time in buying Perrigo, because right now there is a craze for tax inversions. The craze is being driven by hints from the government that it would put an end to tax inversions in the future.

Conclusion

Perrigo is a Buffett-type company except for its Tysabri royalties (another article I wrote on Perrigo selling its Tysabri royalties is here). Financially speaking, I don't understand why anyone would want to buy Shire over Perrigo.

Even if Allergan pays a big premium over Perrigo's current stock price, it should be agreeable to Allergan shareholders due to Perrigo's current undervaluation.

Allergan and Perrigo shareholders would be the winners if Allergan buys Perrigo. Valeant would be the loser because it has a huge debt load with zero growth; that is why debt-rating agencies regard Valeant buying debt-free Allergan as credit-positive for Valeant.

Disclosure: The author is long PRGO. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

About this article:

Expand
Author payment: Seeking Alpha pays for exclusive articles. Payment calculations are based on a combination of coverage area, popularity and quality.
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here