The investment fund headed by Bill Ackman has teamed up with Valeant Pharmaceuticals (TSX:VRX) to make a $50-billion hostile takeover bid for Allergan.
In a letter sent to Allergan's board Tuesday, the activist investor warned a Salix deal would break the Allergan board's fiduciary duty and its commitment to give its shareholders a vote on Valeant's hostile takeover offer for the company.
"We do not believe you can lawfully undertake such a transaction, particularly given your failure to engage with Valeant," he wrote.
Ackman's threat came a day after the Wall Street Journal reported that California-based Allergan (NYSE:AGN) was in advanced talks to buy Salix (Nasdaq:SLXP), which has a market value of about US$10 billion.
The acquisition would make Allergan more expensive and complicated to purchase.
Valeant and Allergan said they wouldn't comment on "market rumours," but Allergan repeated that it believes Valeant's bid is "grossly inadequate."
"The Allergan board is well aware of its fiduciary obligations and, in that context, is focused on enhancing value for all stockholders, unlike Mr. Ackman who is financially incentivized to deliver Allergan to Valeant at the lowest possible price," said a company spokesman.
Allergan also reportedly rejected a bid in August from Actavis Pharmaceuticals that wasn't much higher than Valeant's offer. Unlike Valeant, however, Actavis reportedly pledged to maintain Allergan's investment in research and development.
Valeant and Allergan have been engaged in a heated legal tussle since the Quebec-based pharmaceutical company launched its takeover bid in April.
Analyst David Maris of BMO Capital Markets said Allergan is in the "catbird seat" with many deal options.
"With a cash deal for Salix in discussions and a willing white knight in the wings, we believe that the Valeant bid has little chance of being successful," he wrote in a report.
Maris said acquiring Salix makes sense because it would help diversify Allergan and raise its 2016 earnings to at least US$11.50 per share, up from the current consensus estimate of US$9.72.
Salix specializes in drugs for gastrointestinal ailments. It is in the midst of its own merger efforts with a subsidiary of Italian drugmaker Cosmo Pharmaceuticals that would see it relocate the combined company to Ireland for tax purposes. The North Carolina company's shares surged to an all-time high on Tuesday on reports of the prospective deal with Allergan.
Maris said the deal with Salix removes Allergan's most attractive feature for Valeant — the ability to use its cash to reduce debt while cutting costs.
He suggested that Valeant must significantly raise its bid or walk away.
Maris also said he doesn't believe Pershing Square Capital and Valeant have enough votes to force out Allergan board members at the planned Dec. 18 shareholder meeting.
Allergan's shares gained $4.61 or 2.78 per cent at $170.73 in Tuesday midday trading on the New York Stock Exchange. Valeant's shares were up 48 cents at C$128.80 on the Toronto Stock Exchange and 82 cents to $117.10 in New York.
Follow @RossMarowits on Twitter