Shares of Allergan (AGN) are on the rise on Tuesday after the company announced a definitive agreement under which AbbVie (ABBV) will acquire the company in a cash and stock transaction for an equity value of approximately $63B. Commenting on the news, an analyst at SVB Leerink said a $188 per share price is "too low" and does not rule out the possibility of others pursuing Allergan as well.
ABBVIE AGREES TO BUY ALLERGAN: AbbVie and Allergan announced that the companies have entered into a definitive transaction agreement under which the former will acquire the latter in a cash and stock transaction for an equity value of approximately $63B, based on the closing price of AbbVie's common stock of $78.45 on June 24. Upon completion of the transaction, AbbVie will continue to be led by Richard Gonzalez as chairman and CEO. Two members of Allergan's board, including chairman and CEO Brent Saunders, will join AbbVie's board upon completion of the deal.
Under the terms of the agreement, Allergan shareholders will receive 0.8660 AbbVie shares and $120.30 in cash for each Allergan share that they hold, for a total consideration of $188.24 per Allergan share. The transaction represents a 45% premium to the closing price of Allergan's shares on June 24. AbbVie anticipates that the acquisition will provide annual pre-tax synergies and other cost reductions of at least $2B in year three while leaving investments in key growth franchises untouched. AbbVie is expected to generate significant annual operating cash flow, which will support a debt reduction target of $15B-$18B before the end of 2021, while also enabling a continued commitment to Baa2/BBB or better credit rating and continued dividend growth. It is expected that, immediately after the closing of the Acquisition, AbbVie shareholders will own approximately 83% of AbbVie on a fully diluted basis and the Allergan shareholders will own approximately 17% of AbbVie on a fully diluted basis.
During a conference call to discuss the acquisition, AbbVie said that the Allergan acquisition is a "transformative" transaction that will have "profound impact" on the company's growth story. Further, AbbVie pointed out that it looked at an Allergan deal for over a year, and that it believes a biosimilar to Botox is highly unlikely. AbbVie plans to invest heavily in Botox business, and is comfortable with opioid litigation risk. Additionally, the company does not anticipate any issues with the FTC process, nor does it view the transaction as having a high level of integration risk.
PRICE 'TOO LOW': Following the news, SVB Leerink analyst Marc Goodman told investors that he was not surprised that one of the large pharma companies had made a bid on Allergan given the multi-year stock weakness. However, he sees $188 per share as "too low," and "can't believe that Allergan is not being taken out at least at $200." If AbbVie is "opportunistically pursuing a wounded stock," Goodman believes this bid could initiate others to pursue Allergan as well. He has an Outperform rating on Allegan's shares.
DEALS AT SUCH PREMIUMS 'RARELY KILLED': Also commenting on the transaction, Wells Fargo analyst David Maris said he views the deal as a good alternative for Allergan versus the current share price, but is not convinced that it is a better long-term alternative given the eventual biosimilar threat to Abbvie's blockbuster drug Humira. With that said, Maris told investors "deals at such premiums are rarely killed because of a bad strategic fit or longer-term value outlook in the absence of other bidders." Though he would not completely rule out an activist investor disrupting the deal, he argued that it seems unlikely given the strategic review of the company for some time. Seeing the deal potentially going through, Maris reiterated an Outperform rating on Allergan shares.
PIPER SKEPTIC ABOUT TRANSACTION: More cautious, Piper Jaffray analyst Christopher Raymond said his first reaction to the deal could be summed up with the phrase "two turkeys don't make an eagle." Nonetheless, the analyst told investors he is "willing to listen" despite his skepticism about the transaction. Though he cannot say he is "excited at the prospect of AbbVie entering the field of medical aesthetics," earnings per share accretion of 10% in year one and over 20% at peak, and the potential for meaningful deleveraging and cost cutting have his attention. He kept a Neutral rating on AbbVie shares based on his initial reaction to the deal announcement.
PRICE ACTION: In morning trading, shares of Allergan have jumped about 28% to $164.91, while AbbVie's stock has dropped over 14% to $67.12.
