Saturday, May 25, 2013

My Mistake! The Rumored Price Is Three AND A HALF TIMES B + L's 2012 Sales Revenue; Over 20 Times 2012 GAAP Earnings!

I am sure that Valeant sees this as a pretty attractive possibility, but at 3.5 times 2012 sales (see page 8 of B + L's as-amended SEC registration statement, for its planned IPO), this is simply an overpriced deal. B + L's current and reasonably-expected product lines do not offer high-enough margins -- to justify that lofty buyout price. Early 2000s era four-times annual sales pricings have come. . . and gone -- for good.

Measured another way, on GAAP (not adjusted, non-GAAP) earnings (EBITDA, actually), this $9 billion price would be around 20 times B + L's 2012 earnings. Even the pure branded, high margin proprietary pharmas no longer command a 20 multiple. 12 to 15 would be a more realistic multiple -- even if this was a pure pharma. Bausch & Lomb is no pharma. It mostly sells sterile saline water solutions, for rewetting contact lenses, and the contacts themselves -- primarily. Those are highly commoditized business lines -- with many tough competitors in the space, well-entrenched. B + L's surgical line is newly acquired, and isn't really in its own wheelhouse (nor is it a core skill-set of rumored acquiror Valeant). And so, I'll say it yet again -- if this rumor turns out to be true, at the $9 billion price -- Valeant has overpaid by perhaps 30 percent, here.

Moreover, do recall that Warburg Pincus took about $700 million out of B + L in cash, just about two months ago (see the first full paragraph on page 4 of the Form S-1 amendment) -- using additional bank debt to do so. Will Valeant assume that bank debt? I'd argue that it shouldn't -- that $700 million ought to be repaid by Warburg, prior to closing any rumored deal, and were I advising Valeant, I'd insist on it.

Said another way, if Valeant allows Fred and Warburg to push that $700 million of debt onto Valeant's books, Mr. Hassan will have acheived $9.7 billion of his wanted $10 billion asking price. Recall that Abbott, Cardinal, Merck, Hospira, Pfizer and many other major strategic players, declined to even make firm offers anywhere near Mr. Hassan's $10 billion asking price -- just five months ago, now. That, too, should tell Valeant that it is about to over pay, here. [Updated, and an aside: see below the pull-quote -- for how this little cha-cha may have cost the B + L shareholders a chunk of their return, in other ways, as well. Time is money, afterall.]

In any event, here's more from the WSJ:

. . . .[I]n 2010 Warburg recruited Fred Hassan, a longtime pharmaceutical executive with a history of leading turnarounds and arranging megadeals, to join the firm as a partner and become chairman of Bausch & Lomb. Before joining Warburg, Mr. Hassan led drug maker Schering-Plough and merged it with Merck. Earlier he helped combine Pharmacia & Upjohn Inc. with Monsanto and then sold the resulting company to Pfizer.

It is unclear exactly how much Warburg and its minority partner on the deal, buyout shop Welsh, Carson, Anderson & Stowe, would make on a sale—for reasons that include uncertainty around how much assumed debt would be included. Nonetheless, the return on a $9 billion sale would be multiples of the $1.3 billion or so the firms put into the deal, securities filings show.

The return was plumped by a $772 million dividend Bausch & Lomb paid its owners in March, according to a securities filing associated with the planned IPO. Bausch borrowed $800 million to fund the payout. Warburg owns about 87% of the company, the filing shows, with Bausch executives and Welsh Carson owning the remainder. . . .

Obviously, the above is an updated version of the WSJ's original rumor piece, of Friday afternoon. It goes into much detail, about Warburg Pincus, and Mr. Fast Fred Hassan. If Fred, or his people (at Warburg, or Bausch + Lomb -- including the ex-Merck press guy), are making themselves available for the above sort of background color, on Fred's career, they are effectively closing the IPO window -- at the SEC -- for at least six more months.

Applicable SEC rules impose a "cooling-off" period, once it has been shown that the issuer (Bausch + Lomb) or/and its affiliates (here both Warburg, Fred and the other bankers) have been "priming the pump" -- for the IPO, without filing amendments to the SEC registration statement.

And so, all this deal chatter is jolly good fun, but if it falls through, Mr. Hassan and his crew have likely put B + L in a pinch.

B + L is likely to be locked out of the IPO market by the SEC for about six months from the date that the last bit of this rumor is repeated (if it turns out to be among the sources for the rumor). Nicely-done, Fred! Once again, you've narrowed the stockholders' realistic options for a return of their capital, to inflate your own personal net worth, and feed your ego-driven vanities (all assuming, of course, that you've been allowing these rumors to circulate freely).


Anonymous said...

Kickbacks - Ista, Bausch and Lomb

Fast Freddie strikes again.

Condor said...

Quite so, Anon.!

The unlawful conduct was still occuring at Ista during the peroid Fred was chairman of B + L, and overseeing the negotiations to buy Ista.

Some things never change -- and I suppose it is possible that this Valeant deal talk is simply the latest "shiny object" Fast Fred is using to distract from the bad news the Ista plea deal entails.

Ista will be shuttered by year end, but the reputational hit for B + L will cast a longer shadow, even if B + L is ultimately acquirred by Valeant.

Again, thanks for pointing this out!

Do stop back -- Namaste