Valeant's Asset Sale Clock is Ticking
Valeant is the asset seller that cried "wolf."
Every couple of weeks, it seems, a new Valeant Pharmaceuticals International Inc. asset is reported to be up for sale as the company seeks to pay down some of its $30 billion in debt. Earlier in the month, Takeda Pharmaceutical Co. Ltd. was said to be considering a $10 billion deal for Salix, the gut drugmaker Valeant acquired last year. On Friday, Bloomberg reported that as many as three companies are weighing $2 billion bids for Valeant's eye-surgery division.
But while the thought of a Salix sale sent Valeant shares up more than 30 percent, Friday's report pushed shares up a measly 0.17 percent.
Investors appear to be catching on to the fact that Valeant has trouble with asset-sale follow-through; more than a year's worth of searching for buyers has resulted in only very minor deals. And they're right to be losing patience. Valeant's seeming inability to close sales is increasingly worrying, given the financial pressure the company is under.
The list of assets Valeant is reportedly shopping is expansive; Bloomberg puts the total of reported potential sales at about $15 billion, of which Salix accounts for $10 billion. Valeant has said it could wring $8 billion out of non-core assets (which don't include Salix), so the full for-sale list may be even longer.
Of course, all of this is on paper. The amount of cash Valeant has actually managed to generate from asset sales so far is just $181 million. The company may be due an extra $329 million in milestone payments, but those many not come for years.
Valeant shares have frequently jumped on asset-sale reports, as investors hope for relief from the company's constant game of chicken with its creditors. But investors seem to be realizing Valeant is better at being the subject of deal reports than following through on them.
The fact that Valeant is considering selling Salix -- one of its few high-margin, high-growth divisions -- at a substantial discount suggests "non-core" divestitures won't save Valeant from its debt woes. Similarly, the eye-surgery unit is part of Valeant's once-untouchable Bausch & Lomb division. The fact it's also up for sale is another bad sign.
Potential buyers will only be more likely to demand discounts as Valeant's assets continue to depreciate and the company grows more desperate. Valeant has already sought loosened terms from creditors twice this year. It may need to again if these asset sales don't go through, if its latest 10Q is any indication 1 :
With the slower than forecasted recovery in our dermatology business and underperformance of other select businesses, we have limited headroom in complying with the 2.5x secured leverage ratio maintenance covenant. In recent periods, we have performed below the levels that we had forecast and if that were to continue, we would be in breach of these covenants if we do not take other actions to reduce our secured leverage.
Valeant's situation leaves it little leverage with which to command premium valuations for its assets. And selling at discounts means giving up a lot of revenue for only a little debt relief.
The real wolf for Valeant is the one at the door.
H/T Mark Cohodes.
The full section of the 10Q:
The Company’s Senior Secured Credit Facilities contain specified quarterly financial maintenance covenants (consisting of a secured leverage ratio and an interest coverage ratio). We are currently and, based on our current forecast for the next twelve months, expect to remain, in compliance with these financial maintenance covenants. With the slower than forecasted recovery in our dermatology business and underperformance of other select businesses, we have limited headroom in complying with the 2.5x secured leverage ratio maintenance covenant. In recent periods, we have performed below the levels that we had forecast and if that were to continue, we would be in breach of these covenants if we do not take other actions to reduce our secured leverage. We intend to continue to take steps to reduce our secured debt levels, with funds available from operations and net proceeds from divestitures, and intend to continue to focus on improving our profitability, through revenue growth initiatives and/or the implementation of certain cost-efficiency initiatives, such as rationalization of our SG&A spend. We believe these initiatives can and will allow us to meet our financial maintenance covenants. If we perform below our forecasted levels and are unable to obtain sufficient funds to reduce our secured debt levels through divestitures or other measures, we would fail to comply with one or both of these financial maintenance covenants. In that instance, we would be in default, and our lenders would be permitted to accelerate our debt unless we could obtain an amendment. If our debt was accelerated, we would not have sufficient funds to repay our debt absent a refinancing, and we cannot assure you that we will be able to obtain a refinancing.
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