Thursday, May 30, 2013

I'm Shocked -- "Fast" Fred To Join Valeant's Board Of Directors -- Simply... Shocked.

"Wait?! There's gambling going on in my establishment? MY establishment?!" I'm shocked. Simply shocked1.

Here is Valeant's deal press deck -- and while I've been waiting for Valeant's SEC Form 8-K, for more complete (and less puffed) disclosures on the topic -- according to the slide deck, Fred has been named. Apparently, he will join Valeant's board. [I wonder who will provide D&O insurance -- and at what premium rates.]


Probably my last set of observations on this overpriced, overly-levered deal: when Warburg Pincus took B + L private a few years back, its debt was a modest $820 million. Immediately prior to this deal, B + L's standalone debt weighed in at $4.2 billion (over a five-fold increase -- most of the last billion dollars of that used to pay Warburg Picus over $750 million in cash dividends). The interest payments on that debt-load were $246 million -- completely obliterating all the operating income B + L was then generating. The same story, only amplified by a more than doubling factor, has played out at Valeant: On March 31, 2013, Valeant's debt (immediately prior to the deal) stood at $10.4 billion. We will wait for the official SEC deal filing, but pro forma combined debt for the two companies may approach $14.8 billion -- on a company that may only have EBITDA of around $3.2 billion for the year 2013, on a pro forma basis.

So, debt to EBITDA (forget any GAAP EPS!) will approach 5-to-1 for all of 2013. [This item has been updated: it is closer to 6 to 1.]

Wait. Where have I seen this scenario before? Oh. Right. Dade-Behring, almost exactly a decade ago, now. Hey! Goldman, Sachs was a financier in that deal, too. Those ignorant of history are fated to repeat it.

Just the same, I wish Valeant all the best of luck. That combined management team -- with these moderate margin business franchises, aggressive synergies projections/targets (given that Warburg Pincus already pushed hard on the expense lines, from 2007 to 2013), and the combined, massive debt loads -- will plainly need it.

Put more bluntly -- $800 million of post-merger cash savings in 2014 seems improbable.


1. To be clear, investing with these folks is -- in my opinion -- simple river-boat gambling. Nothing more.

1 comment:

Anonymous said...

In 2003, during the transition from Dick Kogan to Fast Fred, J. Michael Pearson was the first person that Fred sent in. If you recall, Fred was still waiting for the Pharmacia merger to complete before he could join SP in August.

Bertolini helped Fred out with the Pharmacia Financial Audit and Pearson helped Fred and Bob out with VEI at SP (saving over $1B in cuts). (Did they ever sell the Gulfstream IV?)

Pearson left McKinsey to head up Valeant, so now it seems he is just helping out an old buddy.