Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

There's no question Endo International's selloff is hurting investors. For private equity firm TPG, the drugmaker's third-biggest shareholder, the situation stings a little more. 

TPG was set to make at least 6.5 times its investment from the sale of Par Pharmaceutical Holdings to Endo. The deal valued Par at $8.05 billion, $1.55 billion which was paid for in stock. But a 21 percent decline Monday in response to disappointing guidance and the closure of its Astora women's health division instead of a sale left TPG's 7.6 percent stake in Endo worth closer to $720 million, less than half its original value. (The stock fell further early Tuesday, eroding the value even more.)

Worth Less
TPG's profits from the sale of Par Pharmaceutical stand to be dented because it accepted cash and stock from Endo International.
Source: Bloomberg

Though TPG is likely to wait until Endo rebounds before eventually selling its stake and returning proceeds to its investors, the timing could be better. The firm is still working on closing a roughly $10 billion fund and also remains on the fence about an initial public offering of its own.

The silver lining is that the stake may eventually recoup most of its lost value: Analysts on average expect Endo to trade at about $75 in 12 months, roughly 8- percent above what it's currently worth, according to data compiled by Bloomberg.  Also, with Endo trading at just 6.8 times its forward earnings, Perrigo may be tempted into action

Ripening Target?
Endo's stock underperformance means it's more likely to be a takeover target for the likes of Perrigo.
Source: Bloomberg

Still, TPG's current predicament highlights the risks that private equity firms take on when they agree to accept a buyer's stock as payment. While such an arrangement pays off if a buyer thrives, it can lead to unnecessary losses if the opposite occurs.

Given recent volatile market conditions, it wouldn't be surprising to see private equity firms shy away from such risks. In fact, lower valuations may prompt private equity firms to hold off on selling companies they back altogether, and turn towards bargain-hunting instead.

Some stock deals do work out. The investor group that sold Big Heart Pet Brands to Smucker  (KKR, Vestar Capital and affiliates of Centerview Capital and Alpinvest) could have even held onto their stakes longer: Smucker's shares have been on a tear. 

Cashing Out
KKR and the other investors that received stock as part of the sale of Big Heart Pet Brands have sold their stakes at a profit.
Source: Bloomberg, company filings

Notably, even in the highly unlikely scenario Endo's stock falls to zero, TPG will be able to shake off that loss. After all, by being paid partly in cash, it has already locked in a profit of at least $3.5 billion on its sale of Par. So it could be a lot worse.  

Firms involved in future stock-based sales might not be so fortunate. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net