Friends in High Places: The Icahn-Allergan Dynamic

It’s easy to become a friend of activist investor Carl Icahn. All you have to do is make him a $1.7 billion profit.icahn-allergan

That’s what Brent Saunders did when he was CEO of Forest Laboratories. Saunders turned the company around and then sold it in 2014 to Actavis PLC, earning that huge return on his investment for Icahn.

Surprisingly, Actavis made Saunders its CEO. Then, with the ink not even dry on his contract, Saunders made a bold bid for the takeover of Allergan, the maker of Botox. Allergan, anxious to avoid the clutches of Valeant Pharmaceuticals International (NYSE: VRX), said yes.

The deal was done – a wise move in hindsight. The newly merged company took on the name of Allergan PLC (NYSE: AGN).

The Icahn-Allergan Relationship

Fast forward and we come to the failed mega-deal between Allergan and Pfizer (NYSE: PFE). Allergan’s stock tumbled about 25% in the wake of the failed merger.

Allergan’s stock has come to life recently, thanks to Icahn, who announced that he is betting on his friend Saunders again. Icahn said he “had acquired a large position in Allergan.”

The taking of the stake in Allergan is a bit different of an approach by Icahn, who is usually looking to shake things up at a company he takes a position in. This looks like a straight investment in Allergan and Saunders.

Saunders told CNBC that he even asked Icahn if he wanted Allergan to do something differently. Saunders recalled, “(Icahn) said no, that he was confident in our strategy and he looked forward to being an investor for the long term.”

For his part, Icahn said he has “every confidence in Brent’s ability to enhance value.”

In other words, Icahn is confident that Saunders can make him more money. That’s very crucial in the light of Icahn’s bearishness on the overall market.

Allergan Windfall

Icahn’s timing looks to be good with his Allergan investment.

The company will soon close on the sale of its generic drugs business to Teva Pharmaceutical Industries (NYSE: TEVA). The deal will result in an injection of $40.5 billion into Allergan’s coffers.

The company will use some of the money to pay for its announced $10 billion stock buyback. Allergan will also pay down $8 billion in debt immediately. Another $2 billion in debt will be paid as it matures over the next 18 months.

The roughly $20 billion remaining will be targeted for “growth.” But will the $20 billion be used in launching another M&A binge? Or will the company instead focus on growing its portfolio of current products?

I believe the company should stay the course for now. It reported a solid first quarter, with core revenue growth of 10%.

Deals will be tough to come by, even though valuations are down. The U.S. government is still on high alert for tax inversion deals. So if Ireland-domiciled Allergan tries to scoop up any U.S. companies, it will be difficult to accomplish – although buying an overseas drug maker like AstraZeneca PLC (NYSE: AZN) is still a possibility.

I still prefer no M&A action for now. Let’s not forget Allergan has an enormous debt pile – $43 billion – from all its prior deals. It doesn’t want to end up on that same too-much-debt path as Valeant.

The only possible deal I see making sense is Allergan scooping up assets on the cheap from a desperate Valeant, such as Bausch & Lomb, for example.

To me, paying off more debt is the path to pursue for now. Continuing stock buybacks will keep Icahn and other shareholders happy, as will continued solid performance from its businesses.

But everyone, including Carl Icahn, will have to wait and see what Brent Saunders’ next move will be. That M&A itch may be hard not to scratch.

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Published by Wyatt Investment Research at