Salix Pharmaceuticals Ltd. (SLXP) shares surged 15.5% after The Wall Street Journal claimed that Allergan Inc. (AGN) has approached Salix to acquire it. Salix also touched a 52-week high of $162.38 during the trading session on Aug 19. The Wall Street Journal also claimed that Allergan’s decision to bid for Salix is to hinder Valeant Pharmaceuticals International Inc.’s (VRX) proposal to acquire Allergan.
Allergan Inc.AGN +0.82% has approached Salix Pharmaceuticals Ltd.SLXP +1.11% about a potential deal as it fends off a hostile takeover bid from Valeant Pharmaceuticals International Inc.VRX.T +0.36%, the Wall Street Journal reported Tuesday. The terms of Salix’s tax inversion deal signed last month with Cosmo Pharmaceuticals SpACOPN.EB -0.94% now looks like an invitation for a buyout proposal from Allergan. The unusual features include: Lack of a no-shop. The Cosmo deal does not prohibit Salix from seeking an alternative transaction, a provision known as a “no-shop.” The agreement, although not allowing Cosmo to pursue other deals, even permits Salix to sign an agreement to sell itself while leaving the Cosmo deal pending as a possible backup. The Salix board has unusual flexibility to change its mind. Most merger agreements have a relatively complex process for directors to change their recommendation on a deal, including requiring advance notice to the counterparty. In the Cosmo deal, the obligation of Salix’s board to recommend the deal is subject to “its fiduciary duties to the shareholders of Salix” with no procedural requirements associated with any change of recommendation. The agreement contains an atypical “force the vote” provision. Regardless of a change of recommendation by the Salix board, Salix must still hold a shareholder meeting to approve the deal. Sometimes called a “force the vote” provision, this isn’t uncommon. But what is extraordinary is that Cosmo does not have a right to terminate the deal if the Salix board decides to recommend against it. In other words, either side has the right force a shareholder vote even if Salix has found a transaction it prefers. The breakup fee is small. The breakup fee is only $25 million. (Salix’s market capitalization is around $10 billion.) And other than in the case of a breach of the agreement, it is only payable by the party seeking to terminate the agreement following the May 1, 2015, deadline for completing the deal. What does this all mean? Salix would be free to negotiate an acquisition agreement with Allergan that would likely provide for a cash tender offer for Salix shares. The Salix board would be free to recommend that shareholders accept the tender offer. Technically, Salix would still have to take the Cosmo deal to a shareholder vote, but if Allergan’s tender were successful, it would be the majority holder and be able to vote that deal down. No termination fee is payable in such a situation, since the termination would come before the May 1, 2015 deadline. It is more likely that Allergan and Cosmo would negotiate an earlier termination (unless Allergan wants to buy the assets from Cosmo) in return for some payment. A deal like that is likely right in Allergan’s sweet spot for a defensive acquisition. Allergan is unlikely to enter into its own tax inversion transaction. Such a deal would require shareholder approval which would give Valeant and Perishing Square Capital Management LP a forum to argue that shareholders should turn a Salix deal down. A cash acquisition of Salix (or one in which up to 20% of the Allergan shares were issued) would not require a shareholder vote and could be done quickly. Absent antitrust issues, a cash deal could be closed in about a month. Allergan is also unlikely to make a hostile bid for Salix. A complicated transaction of that sort could give Pershing Square enough time to replace Allergan directors before such an offer could be completed. Where would a Salix deal leave Valeant’s bid? That would depend on Allergan’s ability to negotiate a “fiduciary out” in its agreement with Salix. A fiduciary out would allow Allergan to terminate a Salix deal if Valeant offered a deal the Allergan board liked better. Earlier this year Jos. A. Bank Clothiers Inc. signed an agreement to buy Eddie Bauer from Golden Gate Capital to try to stop Men’s Wearhouse Inc.MW +0.65%’s hostile bid. Jos. A. Bank insisted on a fiduciary out over the strong objections of Golden Gate, according to a person familiar to the situation. Men’s later upped its bid, Jos. A. Bank accepted it and terminated the Eddie Bauer deal. It is likely that Allergan would seek a similar fiduciary out and that Salix would object. Salix won’t be anxious to put a price on itself and be left at the altar. On the other hand, the fairly typical breakup fee of 3% of Allergan’s market capitalization would be around $1.2 billion, or about 12% of Salix’s market capitalization. Not bad for a few weeks’ worth of work, after which Salix could still proceed with its inversion transaction with Cosmo, since Cosmo would have no way to terminate. The lack of a fiduciary out would mean Valeant could not win without buying a much more expensive Allergan. Absent a court injunction, it could be the end of the match for Valeant.
Frankly- Any deal with Salix should be called, "The nail in the coffin for Valeant." This deal had very little hope of ever happening and as its been written by many investors, wall street gurus etc.. Valeant finally came up against a company that really wasn't interested in being part of their ponzi scheme. Now there are those that initially thought that not only was this a done deal but also how good this would be for AGN shareholders. Clearly as we see this is simply not the case.
