Top Allergan holder Paulson urges deal with Shire -sources

(Adds details on Paulson shareholdings in Allergan (NYSE: AGN - news) and Shire (Xetra: S7E.DE - news) , background)

By Olivia Oran

Oct 20 (Reuters) - Allergan Inc shareholder Paulson & Co is urging the Botox maker to merge with specialty pharmaceutical company Shire Plc as an alternative to a deal with hostile bidder Valeant Pharmaceuticals International (NYSE: VRX - news) Inc, according to two people familiar with the matter.

The hedge fund, which earlier supported a deal with Valeant, told Allergan CEO David Pyott that it would now support a deal with Shire, the sources said. It was not immediately clear whether Allergan would pursue such a deal.

Paulson had a 1.9 percent stake in Allergan, making it one of the company's top 10 shareholders, according to Thomson Reuters data as of June 30. Paulson was also Shire's third-largest shareholder, according to the data.

Allergan and Paulson declined to comment. Shire, which makes drugs to treat attention deficit disorder and rare diseases, was not immediately available for comment.

Paulson's move, which adds a new twist in the battle for Allergan, comes after Shire's $54 billion "tax inversion" deal to sell itself to AbbVie Inc (Xetra: 4AB.DE - news) fell apart after the U.S. government proposed new rules to make such transactions less attractive.

Last week, AbbVie's board recommended that shareholders vote against the deal. The U-turn caused Shire's shares to plunge, with Paulson and other investors seeing the value of their holdings fall. Paulson had a 1.7 percent stake in Shire as of June 30, according to Thomson Reuters data.

The sources said any deal between Allergan and Shire, which is based in Dublin, would not be structured as a so-called tax inversion.

SunTrust Robinson Humphrey analysts previously said a deal between Allergan and Shire could make sense because it would diversify the sales mix, expand Shire's geographic reach and preserve research and development programs.

Allergan shareholders, including Paulson, have been looking at alternative strategies for the company as it tries to fend off Valeant. The Canadian company teamed up with activist investor Bill Ackman in April to bid for Allergan.

Valeant might raise its bid for Allergan and will not abandon its pursuit ahead of a Dec. 18 special meeting, Michael Pearson (Xetra: 858266 - news) , CEO of the Laval, Quebec-based company, said on Monday.

Some large Allergan shareholders have said they would prefer a deal with drugmaker Actavis Plc (NYSE: ACT - news) to a tie-up with Shire. Actavis plans to approach Allergan again about a potential merger, sources previously told Reuters. (Reporting by Olivia Oran in New York; Additional reporting by Nadia Damouni and Jessica Toonkel; Editing by Chizu Nomiyama, Lisa Von Ahn and Andre Grenon)