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Valeant to replace three board members; Allergan adopts poison pill defence

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Valeant Pharmaceuticals International says three of its directors will not stand for re-election this year as it pursues the acquisition of Botox maker Allergan, which has adopted a "poison pill" defence while it considers the offer.

The announced departures come after Valeant (TSX:VRX, NYSE:VRX) teamed with activist investor Bill Ackman to make a hostile takeover offer for Allergan (NYSE:AGN), which has since announced it has erected a shareholder rights plan that will allow its board time to consider alternatives and potentially block the bid.

"The plan is not intended to prevent an acquisition of the company on terms that the board considers favourable to, and in the best interests of, all stockholders," it said in a news release.

The California-based company said its board unanimously adopted a one-year stockholder rights plan effective Tuesday and declared a dividend distribution of one preferred share purchase right on each outstanding share of the company's common stock.

Under the plan, shareholders of record at the close of business on May 8 will receive one right for each share of Allergan common stock.

The rights will become exercisable if a person or group acquires 10 per cent stake in the company. Ackman's Pershing Square Capital Management LP is Allergan's biggest stockholder at 9.7 per cent.

Rightholders other than those with the large ownership stake will be able to purchase a number of Allergan shares for $500 that have a market value of twice the exercise price of the right.

Valeant said the three departing directors work for private equity investment firms.

ValueAct president Mason Morfit; Fred Hassan, a partner and managing director at Warburg Pincus LLC, and Lloyd Segal, a managing partner at Persistence Capital Partners, are leaving the company.

"Given Valeant's increased size as a company and its ability to look at a broader set of business development opportunities, three of our directors, who have full-time jobs looking at health-care investment opportunities, feel that continued service on the Valeant Board could limit their professional effectiveness," the company stated.

The Montreal-area company said Colleen Goggins, formerly with the Johnson & Johnson group of companies, and Anders Lonner, former CEO of Meda AB who has expertise in emerging markets, have been nominated as replacements.

Valeant said the third vacancy may be filled by a representative from ValueAct.

All three of the departing directors praised Valeant's progress in a statement issued by the company, but Hassan and Segal noted the increased difficulty of avoiding conflicts of interest as Valeant grows.

Valeant and Pershing are proposing a cash and share offer that is valued at around US$48 billion based on the US$134.30 price of Valeant's shares Wednesday on the New York Stock Exchange.

It's proposing to exchange US$48.30 in cash and 0.83 of a Valeant share for each Allergan share. Allergan Inc. stockholders would own 43 per cent of the combined company.

Neil Maruoka of Canaccord Genuity said the so-called merger of equals is attractive but the offer price may not be high enough.

"While we believe this is a very compelling deal presenting excellent strategic fit and a high growth platform, we believe that a higher premium may be required to close the transaction," he wrote in a report.

Allergan's shares were at US$164.10 in Wednesday trading, 2.6 per cent above Valeant's offer price, suggesting investors are likely anticipating a higher offer.

However, Maruoka said "we believe this appetite will increase proportionately with the premium being offered."

Valeant anticipates the proposed Allergan deal will result in more than $2.7 billion in annual cost savings, 80 per cent of which would be achieved in the first six months. About $1.8 billion of the savings would come from overlapping sales infrastructure.

Maruoka said that's more than his initial estimate of $1.85 billion, but Valeant was able to realize more cost savings than predicted from its acquisition of Bausch & Lomb.

Alex Arfaei of BMO Capital Markets, who also estimated $1.9 billion of cost savings, describes Valeant's offer as reasonable.

"We believe that there is a probably a low probability of a cash white knight offer for Allergan," he wrote in a report, adding that Valeant could sweeten the deal by increasing the cash component by at least US$8 billion.

"Given the 50 to 60 per cent reported overlap in shareholder base between Allergan and Valeant, we are now more inclined to believe that Allergan shareholders would have a positive bias for this deal."

Follow @RossMarowits on Twitter.

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