market folly

Bill Ackman's hedge fund firm Pershing Square Capital Management has just filed a new 13D with the SEC regarding shares of Allergan (AGN).  Per the filing, Pershing Square now owns 9.7% of the company with over 28.8 million shares.  This is a brand new position for Ackman and the filing was made due to activity on April 11th.

The stake is actually broken down into 24.8 million shares underlying call options at strikes ranging from $1.20 to $1.33 and exercise dates from March 2015 to April 2015.  They also have exposure to 3.45 million shares of common stock via forward purchase contracts with an expiration of April 22, 2015 and based on a forward price of $140.37.


Working With Valeant Pharmaceutical To Propose Merger

Pershing has filed the 13D jointly with Valeant Pharmaceutical (VRX).  Pershing and Valeant entered into their agreement on February 25th, 2014 and they're working together via a joint vehicle called 'PS Fund 1, LLC' that VRX will contribute $75.9 million to.

There's a lot of details and it's worth viewing the entire SEC filing here (including all exhibits)  But basically, what you need to know is that Valeant intends to propose a merger with AGN.

VRX has been a serial acquirer in the pharmaceutical space under the guidance of CEO Michael Pearson.  The stock is also a hedge fund favorite.

ValueAct Capital has held a large VRX stake for quite some time, as has Ruane Cunniff.  Additionally, VRX was one of Lone Pine Capital's top five holdings in their Lone Cypress fund as of the end of the first quarter.  With Ackman joining the party and now working with VRX, there are a lot of prominent investors involved here.

Per the 13D, Pershing Square intends to "engage in discussions with the Issuer and Issuer’s management and board of directors, other stockholders of the Issuer and other persons that may relate to governance and board composition, management, operations, business, assets, capitalization, financial condition, strategic plans and the future of the Issuer."

The filing also notes that, "Valeant currently intends to propose a merger in which the Issuer’s shareholders will receive a combination of cash and Valeant common shares. Valeant has not yet determined the amount of cash and number of Valeant common shares it will offer, but it currently expects the cash component will total around $15 billion. Barclays and Royal Bank of Canada have indicated that they are prepared to deliver financing commitments covering the cash portion of the transaction at the time Valeant makes an offer.  Although Valeant currently expects to make an offer, it is under no obligation and provides no assurance it will do so.  If Valeant fails to make an offer before May 2, 2014, the Reporting Persons will have the right to terminate the letter agreement."

*** Update: Valeant has proposed a merger of $48.30 in cash and 0.83 shares of VRX for each share of Allergan, with shareholders allowed to elect a mix of cash and shares.  Based on today's trading, that's a deal of about $157 per AGN share, a significant premium over the $116 they were trading at just yesterday. 

If the merger goes through, AGN shareholders would own 43% of the combined company. As Allergan's largest shareholder, Pershing Square would elect to take only stock in the deal and plans on being a holder of the combined entity. ***


Now we know what Ackman was buying with the proceeds from his sale of General Growth Properties shares and Beam shares.