Why Valeant Cracked

Valeant (VRX) has been seeking to divest iNova, its Australian drug subsidiary, for several months now. Market chatter suggested it was looking for a $1 billion price tag or higher. Preliminary bids imply the sale could fall short of the company’s expectations:

Valeant Pharmaceuticals is believed to be weighing its options for its Australian iNova subsidiary after three final bids for the operation in the past week that are understood to be below expectations.

It is believed that offers for iNova from a private equity consortium and two trade buyers came in at around $900 million – below the $1bn-plus offer expectations that were placed on the business.

It is understood that Valeant, a multinational with its headquarters in Canada, is now considering whether to withdraw iNova from the market following a sales process run by Goldman Sachs.

Bids were rumored to be in the range of $650 million to $1 billion. iNova sells both prescription drugs and consumer products. Since all of iNova’s products were not subject to regulatory scrutiny, management was hoping buyers would apply higher growth expectations to the business and be willing to pay a premium price. That did not happen and VRX was down over 4% in late afternoon trading.

The Situation

In late 2015, Valeant pledged to sell assets to help pare its $30 billion debt load. The company practically did not have much of a choice. After being labeled a “price-gouger” by Congress, its ability to grow revenue by raising prices appeared in jeopardy. Valeant has been in talks to sell several of its divisions but has fallen shy of the $8 billion in divestitures it has sought. The only deal that has been consummated is the $1.3 billion sale of certain of its skincare products to L’Oreal (LRLCF).

The play for Valeant is to sell assets at acceptable multiples. The company has traded between 9x-10x EBITDA in recent months. Selling assets at or above those multiples would imply its own valuation multiple is reasonable. If divested assets were sold for less than Valeant’s own trading multiples, then its share price could crater. Market chatter suggests the skincare products were sold for about 13x EBITDA, which supports the bull case. With an enterprise value of $31 billion, the company trades at 9.1x run-rate EBITDA. Its estimated $28 billion debt load is now at 8.1x EBITDA, and counting.