Glossary of Hostile Takeover Terms with Discussion

Please help me see the upside for AGN if it is an a share deal and the AGN value is created by the pfizer share price. Would you also say this deal is more likely with the 29% probability figure you describe? I don't see what compelled BOD for AGN to take this deal. Thanks

 

My understanding is that the cash is in lieu of receiving shares in the new PFE so this will effectively reduce the outstanding shares and not be a net negative to AGN. Dan, can you confirm?

PFE has a planned share buyback and historically has done this in a big way. With overseas cash freed up I suspect through buy backs and dividends the company will be shareholder friendly.

P551

 

Positive spin: btw these numbers have not been posted before

So deal share prices were taken from Oct 28th market close before deal was hinted at.
AGN was $287.20. Forget deal premium % because the deal was structured all on Pfizer share price.

Pfizers price was $35.45. At 11.3 ratio that made AGN worth 35.45 * 11.3 = $400.85

Since deal is based only on Pfizer share price, Pfizer AND Allergan must have that price be attractive to shareholders and investors. Hence the sweetener is at close:

Pfizer shareholders get 1 share for every share they own at close (a double). This mitigates capital gains tax and could make buying Pfizer very profitable down the road. That could be catalyst to drive Pfizer shares higher which = higher AGN price at close. Kinda brilliant if it works. It just looks really bad right now. Dan is of course right, this deal needs to be sold correctly.
To me buying Pfizer shares looks like it has more upside.

Dan and P551 Please correct me if I'm wrong here

 

The SEC filing is now out. There are several breakup clauses enumerated in the filing. Most of the clauses are reciprocal in terms of if either side basically decides against the merger then there is a fee to be paid to the other party. There are 2 key clauses though that we will need to pay close attention to. The first being that the deal is contingent on AGN closing the sale to Teva. While this has always been thought of as part of the deal, there is always some risk associated with this transaction - like all transactions, it ain't over 'til it's over! Secondly, the deal can be terminated if there are any unfavorable tax changes that would remove the tax benefits inherent in the merger and allow PFE to be treated as a US company. See below:

"The Merger Agreement also contains specified termination rights, including, among others, the right of either party to terminate the Merger Agreement if (i) either of the requisite stockholder approvals have not been obtained, (ii) the board of directors of the other party effects a change of recommendation, (iii) the closing has not occurred by October 31, 2016, subject to extension to March 31, 2017 in certain circumstances, (iv) there is a material breach by the other party of any of its representations, warranties or covenants, subject to certain conditions, or (v) there is an adverse change in law that, in the opinion of tax counsel, would cause the Combined Company to be treated as a U.S. domestic corporation for U.S. federal income tax purposes.

In addition, the obligation of the Company to complete the Merger is subject to the closing of the transactions contemplated by the Master Purchase Agreement, dated as of July 26, 2015, by and between Allergan and Teva Pharmaceutical Industries Ltd., as may be amended in accordance with the terms thereof and with the Merger Agreement.

The breakup clauses that require compensation to either party include:

"The Merger Agreement provides, among other things, that a fee is payable if the Merger Agreement is terminated in the following circumstances: (i) if one party’s stockholders vote down the transaction and the other party’s stockholders approve the transaction (and neither party’s board of directors changes its recommendation), the party whose stockholders voted down the transaction must pay a termination fee of $1.5 billion; (ii) if one party’s board of directors effects a change of recommendation in response to a “superior proposal” and the other party’s board of directors confirms that it does not intend to change its recommendation, the party whose board of directors changed its recommendation must pay, on a termination by the other party of the Merger Agreement, a termination fee of $3.5 billion; (iii) if one party’s board of directors effects a change of recommendation other than in response to a “superior proposal” and the other party’s board of directors confirms that it does not intend to change its recommendation, the party whose board of directors changed its recommendation must pay, on a termination by the other party of the Merger Agreement, a termination fee of $3.0 billion if such change of recommendation occurs on or prior to March 1, 2016, or $3.5 billion if such change of recommendation occurs after March 1, 2016; (iv) if one party receives a competing proposal, that party’s stockholders subsequently vote down the transaction, and that party consummates such competing proposal or enters into a definitive agreement providing for such competing proposal within 12 months which is later consummated, the party adopting such competing proposal must pay a termination fee of $3.5 billion; and (v) if a party terminates due to an adverse change in law, the terminating party must reimburse the other party for its expenses up to $400 million.

So here you have it. Most of these terms are customary, but there is an allowance for either party to opt out, for a fee, if either party receives a "superior proposal". Of note is the nominal up to $400 million to be paid if termination is due to "adverse change in law". This tiny amount of money is not going to bind either side, so to me the biggest risk to the deal continues to be related to the tax law and the politics around the deal. This is presumably why Wall Street is not showing either company any love, share price wise. Let's keep up the dialogue! Dan, let us know what your take is on all of this.

P551

 

What do you mean by "a double"?

P551

 

What do you mean by "a double"?

P551
No expert here, okay? But wont PFE shareholders get one share for each they own at close? That doubles the number of shares they own. Regardless of PFE price at they will get a better deal at close vs AGN

Just looking at the close not the combined company post close.

Is that wrong?

 

It's an exchange so it is 1 share of the combined company for 1 share of PFE. A 1 for 1 exchange, unless they choose the cash option.

P551

 

So you are adjusting the price for the cash payment, but not adding in the value creation from any deferred tax liability being eliminated? I guess that just doesn't make sense to me since both are balance sheet items working in opposite directions. If we want to account for one of them, we should account for both of them.

 

Dan - can you give your thoughts on the planned breakup? How much value would that create for the Pfizer stock?

 

Dan, we agree on a lot of things, but apparently this isn't one. You are advocating that the markets has already fully priced in that at some point they would eliminate the deferred tax liability, and thus have access to their hoards of cash without paying uncle Sam. I don't buy it. That's a contingent event that the market could not fully price in. So, as the deal nears closing, and becomes more certain, the value of PFE should increase because of the elimination of the deferred tax liability, and the ability to deploy the hoards of cash that are on hand. That is one of the reasons this deal is being done, is it not? Then, at that point, I agree you offset the cash payment to PFE shareholders.

 

and offset a massssssssive buyback

 

Dan

First, thank you for your posts from the very beginning. Your calm objectivity has been incredibly helpful through the storm(s).

Second, I'm still not understanding what value this merger brings to AGN beyond market expansion. Everyone is talking about the value it brings to PFE? I'm just too naïve to understand.

Finally, I just saw the Bronte Capital blog. The list of Valeant specialty pharmacies (78) is unbelievable.

Thoughts? Again, thanks.

 

http://www.fiercepharma.com/story/allergan-investors-still-too-skeptical-about-pfizer-merger-analyst-says/2015-12-01?utm_medium=rss&utm_source=feedly&utm_campaign=rss
Dan & 551
Looking forward to your thoughts. Thank You

 

This sentiment has been shared by others, including a few of us here on CP. Basically I agree. I think the dust won't begin to settle on the highly politicized aspects of this deal until early to mid next year. I strongly suspect that the Q4 announcements from both companies in the Feb time frame will help boost confidence in the deal and will likely move the AGN share price favorably towards the implied deal value. Remember though that all stock deals always tend to have a larger spread up until close. This is for the obvious reason that the deal value is 100% tied to the acquirer's share price. Any volatility in the underlying stock will whipsaw the spread dramatically. We are suffering from this in the deal and for that reason, we will always see a reasonable spread, right up until close. I doubt the gap will get much closer than 5% until the very end.

I know there has been much said about value creation vs inherent value (i.e. 1+1 = 3 for value creation vs 1+1=2 for inherent value) and the fact that there isn't much obvious value creation in the foreseeble future. I'm of the opinion that the people at power at PFE and AGN, along with their respective cadre's of advisors who do fancy themselves as some of the smartest people in any given room, have information at their disposal to strongly believe there is value creation opportunity. I have learned (i.e. been burned!) that the information we (the common investor/employee/blog readers) are left to digest is only the tip of the iceberg and that the "juicy" stuff is held close to the insiders. There is a reason why this deal was done, and over time the outsiders will be able to understand why. One of the things we as AGN shareholders/stakeholders need to appreciate is that we have benefitted from large share price appreciation in recent times. Big pharma, like PFE, has a much longer time horizon. If we/Wall street are looking for 2016 value creation, we will not see any. However, if we take the view of a longer term big pharma investor and look out to 2018 and beyond, I suspect there is a much greater opportunity for the combined PFE/AGN than as separate standalone companies. Saunders came right out and said this, and he is in the catbird seat at AGN and clearly "knows things".

PFE has turned over every stone it could in an attempt to reinvent itself. They have chosen the AGN stone for reasons non of us are really privy to and I for one am willing to put some stock, literally, into this theory. The combined company will be a cash generating machine. The cash flow, combined with a liberated balance sheet, will result in a very shareholder friendly company. Long term share prices for PFE will approach $50 by end of 2018 - before any value creating potential split occurs. For example, if PFE were to take all of its deferred tax liability (~$24 billion) and use it to buy back shares of the combined company, there would be almost $2.50 in share price boost alone. Who knows if this will happen, but the point is there is an order of magnitude more power in the combined company than AGN currently has alone.

Look for PFE to deliberately boost it's share price in any what they can (stock buyback, "conveniently" positive guidance, etc.) so as we get closer to the AGN/PFE shareholder vote there is no reason for the deal to not get approved. FYI the unaffected share price of PFE the day before the announcement would value the AGN deal at ~$397/share based on the 11.3 share offer. This is not coincidentally close to the published figure that AGN leaked in terms of what it would take to get the deal done. To get back to this level PFE needs to be at about ~$35ish a share. The announced $5 billion share buyback in spring 2016 will add $0.80/share. Based on today's price for PFE this would put the shares at $34.40 - and only 2% away from the magic share price to net AGN ~$400 a share. You can count on this happening so the AGN shareholder vote becomes a slam dunk.

Bottom line, IMO, is that once we get into 2016 and get some 2015 Q4 results, 2016 guidance, and get closer to de-risking the Teva divestiture, we will see AGN share price appreciate. Anyone interested in being bullish can take advantage of the fact that buying AGN and waiting for the deal to close could result in a 15% appreciation based on the differential in the stock prices vs the deal structure. Let's see what happens over the next few months.

P551

 

Thanks for your position, background and research. It is well thought out and highly reasonable. It also closely aligns with the "pitch " of both CEOs. Can I also ask others, why can't AGN grow itself to equal value ? If the Teva deal goes through and we are also flush with cash, and with a different CEO who's philosophy is not M&A but organic growth, why not? There are many things that need to happen still and my "gut" (instinct only) doesn't see this merger making it to completion; AGN is undervalued at $400. Premonition only; i have no training in finance but do read alot. Thanks again 551, appreciate your insight. No one has a Crystal ball but I do enjoy the banter.