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Shock Comes to Harlem 2010 052
 
 

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Valeant's Sum-Of-The Parts Is $0 PDF Print E-mail
Image Valeant's (NYSE:VRX) stock fell sharply after the company announced it wanted to [i] restructure about $3 billion in debt and [ii] remove or alter certain of its maintenance covenants. I believe Valeant's structure represents mullet money; lenders should keep covenants intact and ask for an equity stake. That said, I now estimate the company's sum-of-the parts is $0. The company's Q4 revenue fell 3% Q/Q. EBITDA fell 16% due to falling margins at Branded Rx and U.S. Diversified. The sum-of-the parts, including the sale of certain skincare products, is about $27.1B. Too bad net debt is $29.3B. VRX's sum-of-the parts is $0. Sell the stock.

Valeant's (NYSE:VRX) stock fell sharply after the company announced it wanted to [i] restructure about $3 billion in debt and [ii] remove or alter certain of its maintenance covenants. I believe Valeant's structure represents mullet money; lenders should keep covenants intact and ask for an equity stake. That said, I now estimate the company's sum-of-the parts is $0.

VRX Sum-Of-The Parts Is $0

Valeant's Q4 revenue fell by single-digits sequentially. However, its EBITDA was off by 16% which hurt its valuation. Below is a valuation of each of the company's individual operating segments.

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Full-Year Revenue

Valeant's total quarterly revenue was $2.4 billion. Revenue for Salix was $414 million. Full-year revenue would equate to quarterly revenue annualized.

EBITDA

According to Valeant's Fourth Quarter 2016 Financial Results Conference Call presentation, Bausch & Lomb/International, Branded Rx, U.S. Diversified Products and Corporate Overhead's share of total EBITDA was 38%, 48%, 30% and -16%, respectively. I attributed the same percentage of the company's Q4 EBITDA of $887 million to each of the segments. I also carved out Salix and the divested skincare products ("Skincare"). Salix was put up for sale a few months ago and has a different valuation multiple than the rest of Branded Rx.

  • The implied EBITDA margin for Branded Rx was 51%. I assumed the same EBITDA margin for Salix, which equated to EBITDA of $213 million.
  • The EBITDA for Skincare was assumed to be $25 million. This equates to an annual run-rate of $100 million. According to SA author Endorama Global, Skincare's sale of $1.3 billion was completed for 13x EBITDA. That implies annual EBITDA of $100 million.
  • Quarterly EBITDA for Branded Rx (ex-Salix) would have been [i] $426 million less [ii] $213 million or $213 million.
  • Quarterly EBITDA for Bausch & Lomb (ex-Skincare) would have been [i] $337 million less [ii] $25 million or [iii] $312 million.
  • Full-year EBITDA ex-Salix and ex-Skincare would have been about $2.6 billion.

EBITDA Multiple

The EBITDA multiple of 9.1x for Salix was derived from previous talks Valeant had with Takeda (OTCPK:TKPHF) (OTCPK:TKPYY) in November 2016. Spain's Intereconomia reported that Takeda was acquiring Salix for $9.3 billion, which equated to about 9.1x run-rate EBITDA at the time.

  • The 10x multiple for Bausch & Lomb equates to [i] the 13x multiple for Skincare less [ii] a takeover premium.
  • I chose a 5x multiple for Branded Rx (ex-Salix) and U.S. Diversified. Revenue for both fell sequentially by single digits. However, EBITDA was off 16% for Branded Rx (ex-Salix) and 28% for U.S. Diversified mainly due to free falling margins.
  • A 5x EBITDA multiple for these two segments could be considered kind. These two segments represent a combined 47% of Valeant's total segment EBITDA (prior to corporate overhead).
  • The blended EBITDA multiple is 7.0x. I also applied this multiple to the "Other" segment, which likely represents corporate overhead/allocations.

The sum-of-the parts for Valeant ex-Salix and ex-Skincare is $18.1 billion. The value of Skincare ($1.3 billion) and Salix ($7.7 billion) is a combined $9.0 billion.

Equity Value

Valeant had net debt of $29.3 billion at year-end 2016. Skincare and Salix would reduce net debt to $20.3 billion. Less the $18.1 billion value for the other segments, Valeant's equity value would be -$2.2 billion.

Conclusion

Valeant's sum-of-the parts is worthless. Lenders might also come to this conclusion when deciding whether to restructure the company's debt, and on what terms. I would not be surprised if negotiations with lenders take longer than expected. The stock could remain extremely volatile for the next few days. VRX remains a sell.

 

On Shock Exchange 

With the critically acclaimed, Shock Exchange: How Inner-City Kids From Brooklyn Predicted The Great Recession And The Pain Ahead, author Ralph W. Baker, Jr. predicted the current global economic slow down, the demise of China, emerging markets and the pending stock market crash.

Where to Buy:

"Shock Exchange" is available electronically through Barnes & Noble (NOOK), Amazon (Kindle), iTunes, etc. The print version is available through the following retailers and bookstores:  

Print Version: 

Amazon http://www.amazon.com/

Barnes & Noble online http://www.barnesandnoble.com/

Hampden-Sydney College Bookstore: http://cougar.hsc.edu/cgi-bin/main_inv.exe , item number: 38561. Or call Jason Huskey at 434-223-6117.   

 

 

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