Valeant Pharmaceuticals shares surged on Friday after a report that the company had rejected a joint takeover offer from Takeda Pharmaceutical Co. and TPG, a private-equity firm. Wall Street is taking the rejection as a sign that not only is there interest in the company but also potentially that management believes they can get a better offer. And anyway where there’s more than one offer, a bidding war has the potential to ensue.
Valeant rejects Takeda, TPG
The Wall Street Journal reports that Valeant rejected the offer from Takeda and TPG in the spring before it named Joseph Papa as the next CEO. The newspaper cites unnamed sources who said that the offer didn’t come with a firm price tag. The sources also reportedly said that talks between the three parties aren’t currently underway. They added that Valeant’s board wanted to give Papa a chance to chart a course for the company after taking the helm. He was brought on board in late April.
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When Takeda and TPG made their approach, Valeant was undergoing a scandal related to its accounting practices and questions about its debt load. The drug maker was also looking for its next CEO to replace Michael Pearson. Its shares had tumbled by more than 90%, bringing its market capitalization down to about $10 billion. Valeant’s market cap remains around the same level despite today’s more than 8% increase in its share price, which brought its stock as high as $29.41 per share.
All the problems caused analysts and investors to pressure the company to sell off some of its non-core assets.
Rejection a positive sign?
Susquehanna Financial analyst Andrew Finkelstein said in a report dated May 27 that he sees Valeant’s rebuff of Takeda and TPG as a positive, although he notes that the crucial piece of information missing from The Wall Street Journal’s report is how much the two companies might have been willing to pay or whether there would have been a premium.
The proposal came at a time when Valeant was facing a risk of default because it had delayed filing its 10-K. As a result, he suspects that the proposal might have been “highly conditional” or that the bid might have been so low that shareholders would only have taken it if it were the only alternative to losing control of the company to debt holders.
What the Valeant news means for the sector
Finkelstein believes Takeda entered a bid for Salix last year, but he adds that it’s not clear if the Japanese drug maker would now be top Valeant’s winning bid because it didn’t pursue its bid aggressively at the time. Its lack of aggressiveness suggests that it may not be willing to pay much for Valeant, but needless to say, Takeda’s interest in Valeant now makes sense since it won the bidding war for Salix. Further, Salix has grown since Valeant took it over, and Papa has recently stated that Salix isn’t one of the core asset they would be willing to part with.
The analyst adds that private-equity firms may see the Pharmaceuticals sector as being ripe for deals and suggests that investors seeking “‘beaten-up’ names” that could become takeover targets should watch EV-based metrics rather than PE. He continues to rate Valeant at Neutral and notes that private-equity deals in the sector have mostly been at low multiples. However, he adds that this could “backstop companies struggling to reboot earnings expectations with a longer-term view on investment levels.”