Canada's largest pharmaceutical company is making a play for China with a blockbuster deal that relies on billions in new debt.
Valeant Pharmaceuticals International Inc.'s purchase of Bausch & Lomb Holdings Inc. will give it a foothold in the world's most populated country and expand its reach into other emerging markets, while dramatically boosting the size of its ophthalmology business.
The deal, which is the Montreal company's the largest ever, is a bet that an aging population will spend sharply more on eye care. It also highlights the cheap cost of debt at a time of low interest rates: Valeant will borrow most of the $8.7-billion price of the deal. Of that, $4.5-billion will go to Bausch & Lomb's current owners, an investor group headed by private equity firm Warburg Pincus LLC, and about $4.2-billion to repay the target company's debt.
While the purchase will require Valeant to issue new equity – a rarity in its many deals – and sharply boost its long-term debt to a staggering $18-billion, shareholders approved of the idea. The stock rose 13 per cent on Friday when talk of the purchase first surfaced, and jumped another 10 per cent on the Toronto Stock Exchange Monday after it was announced.
The shares have nearly doubled in the past year, giving Valeant a stock market value of $29.2-billion. That makes it the 17th-largest public company in Canada, worth more than such businesses as Rogers Communications Inc. and Brookfield Asset Management Inc.
In an interview, Valeant chief executive officer Michael Pearson said the purchase of Bausch & Lomb is "completely consistent" with the company's long-term strategy of buying high-margin health care product businesses that are strong in emerging markets, and where customers pay directly for the products rather than relying on government health plans.
Bausch & Lomb, which sells a variety of eye care products in more than 100 countries, contributes operations in China and the Middle East to Valeant's already diversified international footprint. "We've always liked China ... and now] we're going to get into China with a critical mass business in ophthalmology, which we can use as a platform for the rest of our business," Mr. Pearson said.
Bausch & Lomb, founded 160 years ago as a small optical store in Rochester, N.Y., will keep its well-known name and become a division of Valeant.
The deal is expected to close in the third quarter of this year. Valeant said it expects to realize at least $800-million in annual cost savings by the end of 2014. Mr. Pearson said much of that will come from eliminating corporate and headquarters functions and duplicate distribution costs.
He also noted that it is a good time for Valeant to be issuing debt for the acquisition, because rates are so low.
Analyst Neil Maruoka of Canaccord Genuity said the purchase is an "excellent fit" for Valeant and will complement its other businesses in dermatology and generic drug products. He said the level of debt is a concern, but noted that after the deal Valeant will have a ratio of net debt to EBITDA (earnings before interest, taxes, depreciation and amortization) of about 4.6, not much different than the level when Valeant completed its last big acquisition – the takeover of dermatology company Medicis Pharmaceutical Corp. in 2012.
Mr. Maruoka said one of Valeant's core strengths is integrating large acquisitions, and it has done well in picking up companies that have a diverse range of products but don't compete with the biggest drug players. Because Bausch & Lomb has a complementary global footprint to Valeant, there will be lots of opportunities to cut costs, he said.
Mr. Pearson said Valeant will continue to complete small "tuck in" acquisitions, and while it is always talking to potential targets, it probably won't do another large multibillion-dollar deal this year. Still, "I'll never say never," he said.
Mr. Pearson noted that the big deals often take several years to complete from the time they are first considered. He said he started talking to the owners of Bausch & Lomb two or three years ago.
Valeant, which was formed through the merger of Biovail Corp. with U.S.-based Valeant Pharmaceuticals in 2010, has also failed in some of its acquisition attempts. In 2011 it bid about $6-billion for specialty drug company Cephalon Inc., but lost out to another pharma firm that was willing to pay more. And last month merger talks fell apart between Valeant and Activis Inc., a New Jersey-based drug company.