The sale of Bausch + Lomb could result in tremendous gains for Bausch Health investors

Bausch Healthformerly known as Valeant Pharmaceuticals, is a multinational specialty pharmaceutical company with global headquarters in Canada. It serves various therapeutic areas, including dermatology, gastroenterology, neurology and ophthalmology.

The company operates through five main business segments – Bausch + Lomb, Salix Pharmaceuticals, International Rx, Solta Medical and Diversified Products. Bausch Health remains a major player in the healthcare sector, particularly due to the strength of its Bausch + Lomb division in eye care.

Activist investor Carl Icahn filed a 13D with the US Securities and Exchange Commission regarding Bausch’s health on February 11, 2021, saying he plans to engage in discussions with the company’s management and board about ways to increase shareholder value. These steps include the company’s strategic review, which was underway at the time, as well as possible board representation. Later that month, Icahn and the company entered into a director nomination and appointment agreement, under which the company agreed to increase the size of the board to 13 directors from 11 and to name Icahn portfolio managers Brett Icahn and Steven Miller as Directors.

In May 2022, Bausch + Lomb (BLCO) was spun off as a separate publicly traded entity, but continues to be a critical part of Bausch Health’s business through its 88% ownership. At that time, former Icahn portfolio manager Richard Mulligan was added to Bausch Health’s board of directors. In June 2022, John Paulson was named chairman, having previously served on the board from June 2017 to May 2022. The board currently consists of 10 directors and includes Brett Icahn, Steven Miller and Richard Mulligan, with John Paulson as non-executive chairman.

Last weekend, the Financial Times reported that BLCO had retained Goldman Sachs to explore a sale of the company. BLCO currently has an enterprise value of approximately $10 billion, but that value is reduced by various factors, including Bausch Health’s controlling interest and the large amount of debt on Bausch Health’s $20.4 billion consolidated balance sheet. of which $4.6 billion is BLCO’s debt that is consolidated at Bausch Health. As a result, a sale of control to a new entity would solve both of these problems and likely bring much more value than BLCO currently trades for. This would greatly benefit BLCO shareholders, of which Bausch Health is the largest.

BLCO’s estimated 2025 earnings before interest, taxes, depreciation and amortization are $966 million. Peers like it The Cooper Companies and Alcon trade at an enterprise value/EBITDA multiple of 19.5 times and 18.5 times respectively. Assuming an average multiple for BLCO of 19 times, this results in an enterprise value of $18.35 billion. With $4.35 billion in net debt on BLCO’s balance sheet, the implied equity value would be $14 billion. With 351.9 million shares outstanding, that’s a price per share of $39.79. BLCO ended Friday’s session at $15.55 per share – that is, before the Financial Times report. As an 88% owner of BLCO, the value of Bausch Health derived from such a sale would be $12.32 billion.

Moreover, its other four divisions have a total trailing 12-month EBITDA of $2.45 billion. Salix, which deals with gastroenterology, was the company’s most profitable division after Bausch + Lomb, with LTM revenue of $2.25 billion and LTM operating income of $1.55 billion. However, 87% of this business is derived from the drug Xifaxan, which goes off patent in January 2028. With 3.5 years remaining under patent and assuming 5% annual revenue growth (growth was 6% last year ), the Xifaxan business would have a present value of $4.25 billion assuming absolutely zero sales after 2027, which is an extremely conservative assumption. The value Bausch Health will realize from the sale of BLCO alone and the Xifaxan business would be more than enough to retire its $15.45 billion in net debt, leaving a company with $1.43 billion in net cash and four profitable lines of business (“RemainCo”) with aggregate EBITDA of $1.17 billion, after allocating Xifaxan’s corporate region expenses, which is not included in Xifaxan’s valuation above.

So what is RemainCo worth? The International Rx business’ best peer (26.8% of RemainCo’s operating income) is Recordati, which trades at 15.99x EV/EBITDA. The diversified business (45.9% of RemainCo’s operating income) should be similar to lower-growth pharma companies, including Viatris and Organon & Co., which trade at 7.13x and 8.37x, respectively EV/EBITDA. The Solta medical business (12.3% of RemainCo’s operating income) is more complicated. Peer InMode trades at just 4.23x EV/EBITDA, but its revenue fell 31.15% in the first half of 2024 compared to the first half of 2023, while Solta’s revenue rose 18% in the same period period of time. That means the Solta multiple should definitely be at a material premium over InMode. The last part of RemainCo would be the remaining part of Salix (the non-Xifaxan piece), which comprises 14.9% of RemainCo’s operating income and whose peers Takeda Pharmaceuticals and Ironwood Pharmaceuticals trade at 9.57x and 9.72x respectively times EV/EBITDA.

A valuation analysis for a company as complex as BHC using peer multiples is as much an art as it is a science, and certainly some of these multiples may be too high, while others may be too low. While a weighted average multiple would be 9.8 times, we believe that using a multiple of 8 times is correct. That would value RemainCo at $9.36 billion. Adding the value of the proceeds from the BLCO sale, the Xifaxan and RemainCo cash flows generate a total value of $25.93 billion for Bausch Health. After deducting 100% of Bausch Health’s debt, that would generate an equity value of $10.49 billion, or $28.19 per share. Shares closed Friday at $6.32.

Most articles about reported M&A announcements or explorations will include the phrase “the sale process may not result in a deal,” and this situation is no different. However, given that four out of 10 directors at Bausch Health are hedge fund managers and three out of 10 from BLCO (Brett Icahn, Icahn portfolio manager Gary Hu and John Paulson), these boards do not believe that a typical corporate board. Additionally, BLCO CEO Brent Saunders is a well-respected healthcare CEO, but also a noted dealmaker, and would likely not show the resistance normally seen from CEOs of divested companies.

Ken Squire is the founder and president of 13D Monitor, an institutional shareholder activism research service, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist investments.