Valeant to Sell Salix Business to Takeda
How could the Salix sale help Valeant?
Valeant Pharmaceuticals International’s (VRX) probable sale of Salix to Takeda Pharmaceuticals (TKPYY) for $10.0 billion was welcomed by Wall Street. With high volumes, VRX stock rose nearly 34.0% on November 1, 2016, to $23.86, from its earlier closing price of $17.84.
Perhaps talk of a sale stimulated positive investor sentiment. Currently, investors are more concerned about Valeant’s massive debt than its growth opportunity. In order to generate cash flow and repay its debt, Valeant may have decided to explore the sale of its core asset.
Commenting on the Salix sale in a November 1, 2016, press release, Valeant confirmed that it’s “currently in discussions with third parties for various divestitures including but not limited to Salix.”
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Valeant’s major focus is to pay down massive debt
The Salix acquisition was entirely debt-financed with the issuance of 35.0% in bank debt and 65.0% in bonds. For the Salix acquisition, Valeant issued $22.5 billion in debt, which is comprised of $15.0 billion to finance the deal and another $7.5 billion to backstop its existing secured debt.
The financing of the Salix acquisition will raise Valeant’s long-term debt, which moved to $31.2 billion after the deal. Once a Wall Street favorite, Valeant has been plagued with the Philidor controversy, price gouging, huge debt, and the sustainability of its business model. To understand the Philidor controversy in detail, please read What Happened in the Valeant-Philidor Controversy?
Valeant was looking at asset divestitures of $2.0 billion in revenue for noncore assets with the sole purpose to delever. With an EBITDA (earnings before interest, tax, depreciation, and amortization) of 11x, these assets are expected to generate proceeds amounting to $8.0 billion.
If Valeant’s Salix deal doesn’t go through, its share price could fall. Despite these risks related to Valeant, if you want exposure to the stock, you can invest in the Vanguard FTSE All-World ex-US ETF (VEU). VEU offers a 0.03% weight in Valeant.
Valeant’s fall caused a fall in other specialty pharmaceutical companies such as Mallinckrodt (MNK) and Endo International (ENDP), which have similar business models.
In the next part of the series, we’ll look at the impact of a Salix sale on Valeant’s bottom line.