VRX - Valeant Pharmaceuticals International Inc.

[Liberty]

http://online.wsj.com/articles/allergan-approves-special-meeting-requests-1409872078

 

At a Thursday board meeting, Allergan signed off on requests from more than 25% of its shareholders calling for a special meeting, according to a person familiar with the matter.

 

The Botox-maker's board and advisers had been reviewing the requests, delivered by Valeant and Mr. Ackman's Pershing Square Capital Management LP and representing holders of about 31% of its stock, to ensure they had complied with the company's bylaws. If they hadn't, the company could have disqualified them and refused to call the meeting.

 

Allergan hasn't yet reviewed a second batch of consents, covering another 2.8% of shares, that was delivered Wednesday, the person said. Valeant and Pershing Square have until Sept. 14 to deliver additional shareholder consents.

[Cageyone]

I have a small VRX position that dates back to Biovail.  I've been following a lot of negative postings on VRX on the Seeking Alpha Board.  In addition to a lot of "Pearson bashing" there seems to be some concern as to whether they will be able to continue their low tax rate if it's due to deducting "excessive" interest on their high debt load in determining taxable income.  I'm assuming that Ackman has covered this issue in his due diligence! (He seems to "know his stuff" as my CP shares have more than tripled since he got involved in changing the Board and Management at CP!)

[wbr]

I have a small VRX position that dates back to Biovail.  I've been following a lot of negative postings on VRX on the Seeking Alpha Board.  In addition to a lot of "Pearson bashing" there seems to be some concern as to whether they will be able to continue their low tax rate if it's due to deducting "excessive" interest on their high debt load in determining taxable income.  I'm assuming that Ackman has covered this issue in his due diligence! (He seems to "know his stuff" as my CP shares have more than tripled since he got involved in changing the Board and Management at CP!)

 

It makes me feel very comfortable when the consensus is so negative and yet the people who express their opinions with billions of $ keep buying more.

 

And yes, Ackman does more work than anybody and that includes rating agencies and regulators.

 

As far as I understand the tax structure: They dont rely on permanently high interest payments to decrease taxable income. They could stop acquisitions and start deleveraging and their tax rate would stay very low. This is the case because their income is linked to their IP and all the IP is being moved to places like the Bermudas, Ireland or Switzerland. That is where they earn their money and pay the low tax rates - as long as legislation in those countries doesnt change.

However they use their interest expenses (which incur mainly in the US) to offset any earnings that are booked when IP is being transferred away from the US which is important since most of the companies they bought are located there. It is convenient that they will usually have more leverage and interest expenses when they do deals. The Allergan transaction would bring their effective tax rate to about 9%(I think that's what they said) and that will go down over time as they transfer IP.

 

 

[muscleman]

I have a small VRX position that dates back to Biovail.  I've been following a lot of negative postings on VRX on the Seeking Alpha Board.  In addition to a lot of "Pearson bashing" there seems to be some concern as to whether they will be able to continue their low tax rate if it's due to deducting "excessive" interest on their high debt load in determining taxable income.  I'm assuming that Ackman has covered this issue in his due diligence! (He seems to "know his stuff" as my CP shares have more than tripled since he got involved in changing the Board and Management at CP!)

 

It makes me feel very comfortable when the consensus is so negative and yet the people who express their opinions with billions of $ keep buying more.

 

And yes, Ackman does more work than anybody and that includes rating agencies and regulators.

 

As far as I understand the tax structure: They dont rely on permanently high interest payments to decrease taxable income. They could stop acquisitions and start deleveraging and their tax rate would stay very low. This is the case because their income is linked to their IP and all the IP is being moved to places like the Bermudas, Ireland or Switzerland. That is where they earn their money and pay the low tax rates - as long as legislation in those countries doesnt change.

However they use their interest expenses (which incur mainly in the US) to offset any earnings that are booked when IP is being transferred away from the US which is important since most of the companies they bought are located there. It is convenient that they will usually have more leverage and interest expenses when they do deals. The Allergan transaction would bring their effective tax rate to about 9%(I think that's what they said) and that will go down over time as they transfer IP.

 

Bill Ackman didn't buy any VRX, right? He only bought Allergan. I wonder what's he thinking? Is he going to flip this for a quick buck, or is he going to keep the VRX shares after the deal for the longer term?

[merkhet]

I think he's looking for a two-fer. Sort of the way Loeb bought Virgin Media to get into Liberty Global.

[Bagehot]

I have a small VRX position that dates back to Biovail.  I've been following a lot of negative postings on VRX on the Seeking Alpha Board.  In addition to a lot of "Pearson bashing" there seems to be some concern as to whether they will be able to continue their low tax rate if it's due to deducting "excessive" interest on their high debt load in determining taxable income.  I'm assuming that Ackman has covered this issue in his due diligence! (He seems to "know his stuff" as my CP shares have more than tripled since he got involved in changing the Board and Management at CP!)

 

It makes me feel very comfortable when the consensus is so negative and yet the people who express their opinions with billions of $ keep buying more.

 

And yes, Ackman does more work than anybody and that includes rating agencies and regulators.

 

As far as I understand the tax structure: They dont rely on permanently high interest payments to decrease taxable income. They could stop acquisitions and start deleveraging and their tax rate would stay very low. This is the case because their income is linked to their IP and all the IP is being moved to places like the Bermudas, Ireland or Switzerland. That is where they earn their money and pay the low tax rates - as long as legislation in those countries doesnt change.

However they use their interest expenses (which incur mainly in the US) to offset any earnings that are booked when IP is being transferred away from the US which is important since most of the companies they bought are located there. It is convenient that they will usually have more leverage and interest expenses when they do deals. The Allergan transaction would bring their effective tax rate to about 9%(I think that's what they said) and that will go down over time as they transfer IP.

 

Bill Ackman didn't buy any VRX, right? He only bought Allergan. I wonder what's he thinking? Is he going to flip this for a quick buck, or is he going to keep the VRX shares after the deal for the longer term?

 

As part of the deal, Ackman committed to elect all stock and hold at least $1.5B of the combined company for at least one year post closing.

[Cageyone]

Thanks for your insight, wbr! But as a newbie, please help me with the term "IP"!

[cubsfan]

Thanks for your insight, wbr! But as a newbie, please help me with the term "IP"!

 

IP = Intellectual Property

[Liberty]

Pershing Square letter to Allergan board + Valeant rebuttal of recent accusations:

 

http://www.sec.gov/Archives/edgar/data/850693/000119312514336650/d787019dex9937.htm

 

http://www.valeant.com/Portals/25/PDF/09082014%20AGN%20rebuttal.pdf

[original mungerville]

Quite the letter from Ackman!

[Cageyone]

The refuting of AGN's allegations convinces me that Ackman really "knows his stuff"!  Can't wait to see whether and how AGN responds to both documents!

[Liberty]

A WSJ reporter just said that Ackman now has 35% of shares for the special meeting, according to her sources. So it could still pass above 25% even if his 9.7% stake was thrown out for some reason. Wouldn't be surprised if he got a few more percents soon too (the process is so cumbersome that it takes time)...

 

Update: https://finance.yahoo.com/news/allergan-investors-owning-35-pct-143230388.html

[Liberty]

http://agn.client.shareholder.com/releasedetail.cfm?ReleaseID=870493

 

You almost have to admire the gall of these guys...

 

"Notwithstanding Pershing Square and Valeant Pharmaceuticals International, Inc.'s ("Valeant") efforts to change the subject, Allergan recognizes that what actually matters is value, and that's what the Company is focusing on delivering to stockholders."

[Liberty]

http://www.sec.gov/Archives/edgar/data/850693/000119312514340518/d788696ddfan14a.htm

 

New filing by Pershing.

 

New York, Sept. 12, 2014 //- Pershing Square Capital Management, L.P. (“Pershing Square”), the largest shareholder of Allergan, Inc. (NYSE: AGN) (“Allergan”), announced today that it has submitted additional special meeting requests from shareholders owning 1.29% of Allergan’s shares, bringing the total to 35.1%. Not including Pershing Square, shareholders owning over 25% of Allergan’s shares have now provided the necessary documentation and cleared the administrative hurdles in Allergan’s bylaws to join Pershing Square in calling for the special meeting.

 

Pershing Square CEO Bill Ackman, commented: “Allergan shareholders have spoken forcefully about their demand for a special meeting to be called by delivering requests representing 35% of the outstanding shares. Even excluding our shares, Allergan shareholders have met the Company’s extraordinarily burdensome requirements to call the meeting. Hopefully, the board will finally recognize that shareholders want the opportunity to voice their point of view on the board, the bylaws, and the Valeant transaction, and unconditionally call the meeting.”

 

While the company has set a December 18 meeting date, it continues to attempt to delay or stop the meeting by pursuing spurious litigation against Pershing Square and Valeant Pharmaceuticals International, Inc. (NYSE: VRX) (“Valeant”).

 

In addition to the 35% total submitted to Allergan, some shareholders who submitted requests were unable to submit requests representing all of their shares due to the onerous bylaw provisions. Had all such shares been included, the total would have been approximately 39% of outstanding Allergan shares. This percentage continues to exclude shareholders who wished to consent but were unable to submit any shares in compliance with Allergan’s onerous bylaws.

 

According to Allergan, the deadline for shareholders to add to and update their requests with additional shares acquired is this Sunday September 14, 2014. We encourage shareholders who have not yet consented to contact Ed McCarthy at D.F. King at (212) 493-6952.

[Liberty]

http://ir.valeant.com/investor-relations/news-releases/news-release-details/2014/Valeant-Announces-Redemption-of-All-of-the-Outstanding-5000-Million-Aggregate-Principal-Amount-of-its-675-Senior-Notes-due-2017/default.aspx

[Liberty]

http://www.reuters.com/article/2014/09/16/allergan-valeant-pharms-shareholders-idUSL3N0RH1TT20140916

 

Allergan Inc said it has reached an agreement with suitors Pershing Square Capital Management and Valeant Pharmaceuticals Inc to hold a special shareholder meeting on the originally scheduled date, Dec. 18.

 

Pershing Square and Valeant will also dismiss their pending litigation before the Delaware Court of Chancery, Allergan said in a statement late Monday.

 

[Vish_ram]

For Allergan board, the writing is on the wall

[giofranchi]

http://www.bloomberg.com/news/2014-09-10/inversion-pioneer-ubben-delivers-17-as-quiet-activist.html

 

Ubben says ValueAct isn’t going anywhere -- and dismisses Allergan’s defense tactics as desperate. Neither he nor his firm has been sued by Allergan.

 

“We’re big believers in Valeant’s business,” Ubben says.

 

Well, exactly! ;)

 

Gio

[fareastwarriors]

Tiger cub owns VRX

 

http://www.bloomberg.com/news/2014-09-16/tiger-s-chopra-stumbles-in-rise-to-top-robertson-empire.html

 

One of her best trades has been Valeant Pharmaceuticals International Inc. (VRX), which she first told investors about in 2009, when it was trading below $15 a share. She was convinced its new CEO, Mike Pearson, would turn the company around.

 

Pearson spent at least $19 billion on more than 35 acquisitions in an attempt to turn the company into one of the world’s largest drugmakers. Valeant now trades at $121.43. As of June 30 it was Ratan’s largest holding with a $92.3 million market value. Robertson credits Chopra as being the first manager within the Tiger community to invest in the stock and recommend it to others.

 

Allergan Offer

 

Valeant, a big contributor to Ratan’s performance, has slumped 10 percent since April when the company teamed up with Bill Ackman’s Pershing Square Capital Management LP to make a cash and stock offer for Allergan Inc. (AGN) The decrease contributed to a 7 percent loss for Ratan in July and a 0.6 percent decline in August.

[muscleman]

From WSJ in 2012:

 

There will be some upfront costs for Medicis to obtain the tax advantage, because Valeant must record a sale and pay taxes on any gains when it moves Medicis’ patents to its offshore subsidiaries. However, Willens said any upfront payment will be much smaller than the long-term benefit from the tax strategy.

 

 

 

 

So this is what I was talking about in not understanding how they are structuring these deals and why others couldn't do the same -- At the time of this deal they had said they would have to make a payment to take Medicis offshore and have a one-time tax hit.  This is what I would expect and the reason I don't think others do this. The point of the law is that the one-time payment basically takes away most of the upside if the offshore subsidiary pays fair price.

 

In Valent's case, they said there would be a one-time tax hit too. However the one-time tax hit never seems to have taken place as far as I can tell.  So either Valent has outsmarted the IRS and taken it off-shore for a relatively minor payment. Which is great for shareholders though I am not sure how sustainable it is - as they get bigger its bound to draw more scrutiny from the IRS.  The alternative is they still haven't taken it off-shore and that they are either paying U.S. taxes or depleting their U.S. NOL's which means investors need to model a one-time tax hit in the future.

 

I think research analyst's are just accepting management's premise that taxes will remain low in perpetuity. I just think this is hard to accept without first understanding how this is currently achieved.  How do you judge if it's sustainable if you don't know how they do it.

 

There are several things at play here. First, VRX is a Canadian firm subject to Canadian tax law. Canadian tax law, unlike US tax law, doesn't provide for a worldwide taxation system. Therefore VRX can freely repatriate any money earned in other jurisdictions to Canada without paying tax. The chance that Canada would change this law is definitely a risk factor for VRX, but as of now there is no proposed legislation in place to do so. Further, it isn't clear how much VRX really needs to repatriate anyway, since Canada isn't really their target market for further investment. Nonetheless, if Canada were to adopt a system more like the US's, it would not be a positive for VRX.

 

As for US taxes, the way it works is VRX loads up their US subs with debt to shield basically all taxes. So they can issue debt in the US, use the proceeds anywhere in the world they want, and the interest shields most/all of the high US corporate tax. This is probably not something that is likely to change, the tax-deductibility of debt in the US comes up from time to time but there would be an immediate and well-coordinate outcry from all capital intensive industries if Congress ever really threatened to take away the interest deduction.

 

One additional related point is that VRX has ~$1B in NOLs available to shield the one-time gain on transferring IP from any businesses they buy.

 

Last, generally speaking VRX isn't looking to buy US businesses, maybe some tuck-ins like the recent SLTM deal, but they are much more focused on emerging markets. Since they are subject to Canadian tax law and generally speaking EM countries have poorly developed tax codes and/or low absolute tax burdens, the sustainability of their tax arbitrage isn't highly dependent on US tax policy.

 

Hope this helps!

 

Does this mean the current $17 bn long term debt are all issued by subsidiaries? Are they guaranteed by the parent or not? I think the risk would be much smaller if they are not guaranteed by parent.

[morningstar]

Does this mean the current $17 bn long term debt are all issued by subsidiaries? Are they guaranteed by the parent or not? I think the risk would be much smaller if they are not guaranteed by parent.

 

It's all guaranteed by the parent.

[TonyG]

What are the odds of Allergan trying to do their own acquisition before the Special Meeting in order to stop the takeover? And if they do try that do shareholders get to vote on it or is it just managements choice?

[Liberty]

What are the odds of Allergan trying to do their own acquisition before the Special Meeting in order to stop the takeover? And if they do try that do shareholders get to vote on it or is it just managements choice?

 

That's their last play, pretty much. There are rumors that go back and forth between Salix and JAZZ... I kind of doubt that they could justify not having a board vote, especially if it's an inversion. And if it's not an inversion, I doubt they can argue that it's a more value-creating deal than what Valeant is offering. They'd also probably have to pay quite the premium because Salix or JAZZ probably isn't interested in selling itself just to make it convenient for the Allergan management to keep their jobs, so they'd need quite the incentive... And if I was Allergan's management, I'd be worried about shareholder lawsuits for lack of diligence in their fiduciary duty. They still haven't even talked with Valeant, and certainly haven't got anything that would require a NDA, so how are they supposed to have made an informed decision?

[TonyG]

Liberty, thanks for the response. If they did announce a deal within the next couple of weeks and shareholders filed suits, would this be able to put the merger on hold, by which time the Special Meeting came about, or would this be an after the fact type of thing?

[Liberty]

Liberty, thanks for the response. If they did announce a deal within the next couple of weeks and shareholders filed suits, would this be able to put the merger on hold, by which time the Special Meeting came about, or would this be an after the fact type of thing?

 

I don't know. Not sure it's knowable at this point.

 

Here's an op-ed basically opinating that Allergan's board could keep fighting its own shareholders to the death even after a special meeting vote:

 

http://blogs.wsj.com/moneybeat/2014/09/18/dealpolitik-allergan-fight-could-extend-long-past-december-meeting/

 

Interesting how far bad faith is assumed to go at Allergan... Who owns Allergan, the board, or the shareholders?