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Allergan readies defense as it fights Valeant

By Caroline Humer and Deena Beasley

NEW YORK and LOS ANGELES (Reuters) - Allergan Inc may take on debt to buy back its own shares as part of a multi-faceted plan to thwart a $53 billion takeover bid by Valeant Pharmaceuticals International Inc and activist investor William Ackman.

The company is also considering making acquisitions of its own and more spending cuts to increase shareholder value, Chief Executive David Pyott said in an interview, outlining steps to build support for Allergan, best known for its Botox anti-wrinkle injections, to remain a standalone company.

But Allergan, which is expected to unveil the plan when it releases second-quarter results sometime in July, faces an uphill battle.

Valeant says it already has enough shareholders on its side to call a special meeting to replace Allergan board members with nominees who support its takeover proposal. To call a meeting, the acquisitive Canadian company needs support of the holders of at least 25 percent of the shares.

It is possible that Allergan can turn the tide, but it won’t be easy, said Ronny Gal, an analyst at Sanford C. Bernstein.

"When I run my numbers, a buyback alone doesn't quite cut it,” Gal said. “A buyback plus another round of costs cuts, or the acceleration of the discussed cost savings, does."

An Allergan acquisition could help as well if it increases the company's profits, Gal said. In order to get near-term investors on its side, Allergan needs to deliver another $10 per share of value in 2015 or $11 per share in 2016, he said.

"The question is, how big of a buyback and how big are the cost cuts?" he said.

   

LEVERAGED BUYBACK

Allergan announced an initial round of spending cuts in May when it first rejected Valeant’s offer. When it rejected Valeant's offer again on June 10, it said that it would unveil more cuts and capital measures when it releases its second-quarter results.

In the interview,  Allergan CEO Pyott was more specific.  Pyott has met with investors to talk about the company’s defense, which he said could include issuing new debt to buy back shares. He said Allergan could borrow up to $10 billion without affecting its investment-grade rating, but he did not say how much the company might spend on the buybacks.

"Our goal now is to give them most of what they want," Pyott said, referring to Allergan shareholders.

A leveraged buyback would increase the amount of Allergan's debt, making its balance sheet less attractive to a would-be acquirer. Allergan currently has little debt, one of the company features that appeals to debt-laden Valeant.

A buyback would also reduce the number of shares outstanding, which would raise its earnings per share and increase shareholder value. An acquisition by Allergan could also increase earnings, he said.

THE VALEANT PLAN

Valeant Chief Executive Michael Pearson said in an interview last week that he believes Valeant and Ackman, who owns nearly 10 percent of Allergan through Pershing Square Capital Management, have the backing of enough Allergan shareholders to support the deal.

According to sources, Valeant and Ackman have won over a prominent hedge fund, Paulson & Co., which has bought more than 6 million Allergan shares.

The company has said it will cut about $2.7 billion in spending at Allergan and that it would rely less on internal research and development in the future. Allergan says that such cuts would limit the company's growth potential.

Valeant also might pay more to get a deal done, Pearson said. Valeant has already raised its offer twice but has held firm now for about a month.

"We have a walk away price for Allergan. I can’t tell you what our walk-away price is, but right now we don’t have any reason to raise because we would be bidding against ourselves," Pearson said.

The offer, which includes $72 in cash plus 0.83 of a Valeant share, is currently worth about $177 per share, or $53 billion. The deal value is calculated based on 303.5 million diluted shares outstanding as of March 31, and Ackman’s holding of 28,878,638 shares.

(Additional reporting by Rod Nickel in Winnipeg, Manitoba and Olivia Oran in New York)

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