Unsurprisingly, everyone is taking sides in Valeant Pharmaceuticals Intl Inc (NYSE:VRX)’s push to buy out Allergan, Inc. (NYSE:AGN). While John Hempton of Bronte Capital sided with Allergan, analysts from at least two firms have taken the opposite approach. They see more value for Allergan shareholders in a merger with Valeant.

valeant Allergan

Allergan’s standalone value limited

In a report dated June 10, 2014, JPMorgan analyst Christ Schott and his team said they see limited potential for Allergan, Inc. (NYSE:AGN) if it remains separate from Valeant Pharmaceuticals Intl Inc (NYSE:VRX). They met with Allergan CEO David Pyott after the company formally rejected Valeant’s new offer. Pyott emphasized that they believe Valeant’s new offer still undervalues Allergan and that they remain focused on creating shareholder value that goes beyond the offer from Valeant.

Allergan, Inc. (NYSE:AGN) management said they are looking for more opportunities to cut costs and that they plan to announce some of them around the release of their second quarter results. Those cost-cutting measures will go beyond the updated guidance they provided in May, which suggested a 20% compound annual growth rate over five years for earnings per share.

Allergan’s standalone value could increase, but maybe not enough

In light of these cost cutting measures, the JPMorgan team said there does appear to be more upside for Allergan, Inc. (NYSE:AGN)’s standalone numbers. However, they believe Valeant Pharmaceuticals Intl Inc (NYSE:VRX)’s offer sets the bar very high—possibly so high that Allergan can’t create more value for shareholders than what Valeant can provide.

The analysts estimate that every $100 million of operating expenditure reduction would add about 25 cents per share for their estimated 2016 forecast, which is $8.42 per share. However, they think Allergan, Inc. (NYSE:AGN) will need to present “a compelling case” that its cost cuts won’t place its standalone topline growth in jeopardy since the drug maker currently has a very high standalone multiple. They believe it’s possible that Allergan, Inc. (NYSE:AGN) will increase its share buyback plans but that Wall Street would not be all that receptive to this because of the company’s current valuation.

Schott and his team continue to rate Allergan, Inc. (NYSE:AGN) as Overweight with a $190 per share price target.

Wall Street may disagree with Allergan’s arguments

In a separate report also dated June 10, 2014, BMO Capital analyst Alex Arfaei said it’s un surprising that Allergan, Inc. (NYSE:AGN) rejected Valeant Pharmaceuticals Intl Inc (NYSE:VRX)’s new proposal. However, he said he was surprised at some of the arguments Allergan made in terms of why it rejected the offer. He said one of the slides in the presentation suggested that there was no “take-out premium” in Allergan stock in connection with Valeant’s offer. He thinks most investors disagree with this view because of the stock’s reaction in the wake of the rejection.

The analyst also disagrees with how Allergan, Inc. (NYSE:AGN) characterizes Valeant Pharmaceuticals Intl Inc (NYSE:VRX)’s business model. He said Valeant’s recent guidance and first quarter performance suggests the opposite of what Allergan said, which was that Valeant’s third quarter results will show that its organic growth is weak.

Next steps for Valeant

He thinks that Valeant Pharmaceuticals Intl Inc (NYSE:VRX) and Pershing Square Capital Management will continue to pursue a buyout, calling a special shareholder meeting between August and November. They are trying to replace most of Allergan’s board members.

The analyst also thinks that as time goes on, shareholders will begin to increasingly support a deal with Valeant Pharmaceuticals Intl Inc (NYSE:VRX). He notes that Allergan, Inc. (NYSE:AGN) thinks it deserves a multiple of between 25 and 27.5 times P/E, which would be between $169 and $197 per share in the near term. However, he estimates that shareholders would receive a value of $199 per share (14.2 x $10.80 x .83 + $72 cash) “plus the CVR for DARPin.”

That estimate assumes that the combined company continues trading at Valeant Pharmaceuticals Intl Inc (NYSE:VRX)’s current multiple and an estimated 2014 pro-forma earnings per share estimate of $10.80 for the combined company. They say this is actually conservative because it doesn’t assume a multiple expansion after the acquisition of Allergan, Inc. (NYSE:AGN). If the multiple expands from 14.2 times to 16.5 times for the combined company, they get $220 per share plus CVR.

Arfaei continues to rate Valeant Pharmaceuticals Intl Inc (NYSE:VRX) as Outperform with a $165 per share price target.