The agreement of Valeant Pharmaceuticals to acquire Salix Pharmaceuticals for $158 per share in cash is under pressure after Endo International recently submitted a higher counter offer of $175 per share in cash and stock.

After learning about the Endo’s counter proposal, Valeant issued a statement indicating that it is firmly committed to the all-cash agreed transaction with Salix. The company emphasized that its deal delivers immediate and certain value for Salix shareholders.

Valeant’s tender offer for Salix is scheduled to expire by the end of this month. The company expects to be in the position to close the transaction on April 1, 2015.

Valeant-VRX Valeant Pharmaceuticals

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Endo’s bid not equally attractive as Valeant’s 100% cash offer

Several analysts covering the pharmaceuticals industry issued comments regarding the unsolicited counter-bid of Endo to acquire Salix.

Jefferies analyst David Steinberg and his team said they are not surprised that another bidder emerged to acquire Salix given that fact that they previously noted that a $158 per share acquisition price of the company is considered a “relative bargain” because it has strong fundamentals and long duration assets.

The analysts also noted that Endo previously offered to buy Salix for a total consideration of $150 per share, and the timing of current bid is unusual. According to Steinberg and his team, Endo’s current bid is likely linked to the recent sale of its AMS business for $1.6 billion to Boston Scientifics.

Steinberg and his team commented that Endo’s $175 per share offer to buy Salix, which is composed of 25% cash and 75% in stock “may not be as attractive” as the 100% cash offer from Valeant.

Valeant could match Endo’s bid

The analysts added that Valeant “could match Endo’s bid and still achieve 17% EPS accretion in FY16. They also noted that a transaction between Endo and Salix is unlikely to close until after March 27, the critical FDA action date for Xifaxan IBS-D.

Steinberg and his team said, the shareholders of Salix will have to decide whether they prefer the certainty of an all-cash offer from Valeant or take the possible risk of Endo shareholders voting against the proposed merger if the Xifaxan sNDA does not get FDA approval. The analysts said, “We view the likelihood of approval at 85%. But it is still a major consideration.

The analysts also believed that Valeant could easily match the Endo’s proposal. They noted that Valeant typically does not engage in bidding wars. However, they commented that they will be surprised if the company will not increase its bid in this situation.

Steinberg and his team explained, “In our initial analysis, at $158/share, we derived FY16 pro forma EPS accretion of 18.4% to VRX. By simply increasing its cash bid to $175/share and holding all variables constant, we still come up with 17% EPS accretion in FY16. Moreover, while we expect VRX mgt to be price disciplined, our math suggests that VRX could pay as much as $200/share in cash and still realizes 15% EPS accretion in FY16.”

Why Valeant can outbid Endo

On the other hand, BMO Capital Markets analyst Alex Arfael believed that there is still 70% probability that Valeant would end up acquiring Salix at a higher price, around $170 to $175 per share.

He also commented that Valeant can outbid Endo not just because it can pay more cash, but because it has also a lower tax rate. He noted that Endo’s 2015 tax rate guidance was around 15% to 17% while around 5% to 6% for Valeant.

Arfael also noted that Endo would have to account for a $356 million break-up fee or approximately $5.50 per share to Valeant.

Arfael suggested that Valeant can match Endo’s $175 per share offer. The analyst suggested that under such scenario, Valeant’s higher offer may be comprise of 90% and 10% stock, which he estimated to be still 19% accretive in 2016 and 23% accretive in 2017.

The analyst estimated that Valeant may be willing to pay as high as ~$207 per share($158 in cash and the rest is stock), which is still 15% accretive in 2016 and 19% accretive in 201.

Arfael said he highly doubt that Endo would match a $207 per share offer. He expected the shares of Valeant to climb following such potential offer as the probability of the deal increases.

Below is some more from analysts:

Jeffries (VRX/ENDO)

ENDP has approached SLXP with a counter-offer to VRX’s outstanding all-cash bid for $158/share. The co is offering $175/share, however as this is a 25% cash/75% equity transaction it may not be as attractive as VRX’s 100% cash offer. Further, in our analysis VRX could match this $175 bid in cash and still achieve 17% EPS accretion in FY16. Timing relative to the Xifaxan IBS-D action date could also play a role.

 

CRT Capital (VRX)

While we expect the Salix Board to review Endo’s offer, we believe Valeant’s $158/share all cash offer still remains the soundest bid currently. We say this based on 1) it being all cash with no contingencies vs. Endo’s proposal which is mostly equity financed, 2) there being no risk for Salix shareholders that Endo shareholders reject the deal vs. Valeant’s offer which does not require shareholder approval, and 3) no risk to Salix shareholders with the upcoming Xifaxan PDUFA date (~May 27) for its IBSD treatment indication. In sum, we believe Valeant has the upper hand in closing its planned purchase of Salix.

 

Canaccord Genuity (ENDO)

Why Valeant is more likely to win:

  • Valeant’s $158 offer is fixed, fully financed, and all cash
  • Endo’s $175 offer depends on its share price, and goes down if its stock goes down
  • The pending IBS-d PDUFA in May adds a layer of uncertainty
  • Requires a shareholder vote and perhaps more uncertainty
  • Endo doesn’t have committed financing (yet) and would need to raise $4B in debt since it has to “make whole” $3.1B in Salix debt
  • Endo still needs more due diligence (but only a week’s worth)
  • A large $356M break-up fee
  • Valeant can raise its bid if it needs to, but expects to close April 1.

 

BMO (VRX)

Given that Valeant’s offer will have a significantly greater cash component vs. Endo’s offer at only ~25% cash, we believe that if equal or close, Valeant’s offer will likely be more attractive to Salix shareholders. We also believe that Valeant can out compete Endo not only because Valeant can pay more cash, but also because Valeant has a lower tax rate (Endo’s 2015 tax rate guidance is 15-17% vs. Valeant at 5-6%). Recall, that Endo would also have to account for a $356mm break-up fee to Valeant, or roughly $5.50 per share.