Poison pill could block Allergan takeover

Allergan, the target of a hostile takeover by Valeant Pharmaceuticals and hedge fund Pershing Square Capital Management, has launched a shareholder rights plan, often known as a "poison pill", in an attempt to block the bid.

The botox-maker said late Tuesday that it will declare a dividend distribution of one preferred share purchase right for each outstanding share of the company's common stock, creating a large number of new shares.

Shareholders on the register on 8 May 2014, will receive one right for each Allergan share held on that date. The rights become exercisable if any party acquires 10% or more of Allergan's shares.

The company issued a statement saying that the move is not designed to prevent an acquisition of the company on favourable terms but provides the board with adequate time to fully assess any proposal.

In the proposal, Valeant offered $48.30 (£28.70) in cash and 0.83 of its share for each share of Allergan.

Pershing Square, led by shareholder activist Bill Ackman, has accumulated 9.7% of Allergan shares, worth more than $4 billion. Pershing and Valeant say there are $2.7 billion potential cost savings in the merged venture.

Valeant chief executive Michael Pearson has bought big medical brands like Bausch & Lomb, stripping out costs and feeding their products through the company's existing sales platform, but at $50 billion this deal would be much larger. Still, there is determination on both sides and Allergan has enlisted Goldman Sachs, Bank of America Merrill Lynch and Latham & Watkins, while Valeant is taking advice from Barclays and RBC which have agreed to lend it $15.5 billion to push on and secure the takeover.

Success would saddle Valeant with a massive $28 billion debt, three times adjusted earnings before interest, tax, depreciation and amortisation (EBITDA), though Ackman and Valeant touted the almost-immediate $6 billion in free cash flow a merged entity would be able to generate, thanks to that $2.7 billion in cost savings.