UPDATE 3-Canada drugmaker Valeant to buy Bausch & Lomb for $8.7 billion

Mon May 27, 2013 1:16pm EDT

* To acquire Bausch & Lomb in all cash deal
    * Deal to be financed via debt and equity offering
    * Deal expected to immediately boost Valeant's cash EPS
    * Valeant shares hit all-time high in Toronto


    By Euan Rocha and Rod Nickel
    TORONTO/WINNIPEG, Manitoba, May 27 (Reuters) - Valeant
Pharmaceuticals International said on Monday it agreed
to buy Bausch & Lomb Holdings Inc from Warburg Pincus LLC for
$8.7 billion, a cash deal set to vault the Canadian company into
the upper ranks of the global pharmaceutical sector.
    The purchase strengthens Valeant's offerings in ophthalmic
pharmaceuticals, contact lenses and lens care products, along
with adding ophthalmic surgical devices and instruments to its
portfolio.
    Valeant shares rose nearly 8 percent in Toronto to C$93.71,
touching an all-time high. It had gained 13 percent on Friday
following reports a deal was in the works. The company's stock
has multiplied six times over in about three years, with Valeant
racking up some 60 deals since 2008.
    Bausch & Lomb is by far Valeant's biggest acquisition to
date, and will place it roughly among the 15 largest global
pharmaceutical companies, said Valeant Chief Executive Michael
Pearson in an interview with Reuters.
    "This is a 160-year old company and brand name. I think
we'll be able to really leverage that," he said, adding that the
deal will boost Valeant's 2013 earnings.
    Talks with Bausch & Lomb have been going on and off for a
few years but intensified in recent weeks, Pearson said, adding
that opthalmology is attractive for its growth prospects and
Bausch & Lomb's large proportion of sales directly to consumers
is also appealing. 
    Laval, Quebec-based Valeant plans to keep all three of
Bausch & Lomb's segments of contact lenses, pharmaceuticals and
surgical instruments, said Pearson, putting to bed some market
speculation from Friday that the company may seek to sell the
surgical instruments arm.  
    The Bausch & Lomb deal also gives Valeant the large scale of
operations that it lacked in China and emerging markets like the
Middle East, Pearson said.
    "We are thrilled about the deal," said James Telfser, a
portfolio manager at Caldwell Investment Management. "We are
invested in Valeant right now, because we want something exposed
to the U.S. and emerging markets and this definitely just beefs
up that thesis."
    
    DISCIPLINED STRATEGY
    "The reason we've always liked Valeant is because they have
a disciplined acquisition strategy and they have been very clear
all along that they are going to make another transformational
deal, said Telfser, adding that Valeant accounts for 6.5 percent
of the value of its Caldwell Canadian Value Momentum Fund.     
    Valeant has been on the acquisition trail since its 2010
takeover by Biovail Corp, which assumed the Valeant name. It has
been pursuing deals with strong cash flow in high-growth areas
where big pharmaceutical companies have little presence.
    In opthalmology, however, Valeant will be competing more
directly with heavyweights like Novartis AG, Allergan
Inc and Johnson & Johnson.
    Valeant, known for its prescription drugs such as
anti-depressant Wellbutrin and over-the-counter remedies such as
Cold-FX, has built up its dermatology and anesthetics portfolio
in a dozen deals in the past year. 
    Last month Valeant attempted to acquire generic drugmaker
Actavis Inc in an all-stock deal that would have topped
$13 billion, according to sources familiar with the matter.
    Valeant, which has a market cap of about $26 billion, is
likely to focus on integrating its new acquisitions for the rest
of 2013, but will still look for smaller buys that fit its
dermatology and opthalmology businesses, Pearson said.
    "One of the key attractive attributes of Bausch & Lomb's
business model is certainly the high level of private pay," said
Canaccord analyst Neil Maruoka. "Valeant generally likes to
avoid products and markets that receive a high level of
government reimbursement." 
 
    EQUITY FINANCING
    The brisk pace of acquisitions has pushed Valeant's debt to
trailing EBITDA (earnings before interest, taxes, depreciation
and amortization) to over four times, and the Bausch & Lomb deal
will lever it up to 4.6 times, Pearson said.
    By the second half of 2014, however, Bausch & Lomb's strong
cash flow and EBITDA should help bring that ratio to under four
times, he said, which was previously Valeant's goal for 2013.
    "Our M&A strategy, we believe is sustainable," Pearson said,
adding that the company also pursues organic growth.
    The deal, to be financed through debt and equity, will see
some $4.5 billion go to an investor group led by Warburg Pincus
LLC, with some $4.2 billion used to pay down Bausch & Lomb's
outstanding debt.
    Warburg Pincus stands to make close to three times its
investment in Bausch & Lomb, according to a person familiar with
the matter. Warburg Pincus declined to comment.
    The deal will be financed with debt and about $1.5 billion
to $2.0 billion of new equity, said Valeant, which has secured
committed debt financing from Goldman Sachs.
    Valeant expects the deal to result in at least $800 million
in annual cost savings by end of 2014. This will come from job
cuts, and savings in purchasing and legal costs, Pearson said.
    Bausch & Lomb is expected to generate revenues of about $3.3
billion and adjusted earnings before interest, taxes,
depreciation and amortization of about $720 million in 2013.  
    The company said Bausch & Lomb's CEO Brent Saunders will
join Valeant in an advisory role to ensure a seamless transition
and integration. Fred Hassan, Chairman of Bausch & Lomb's board
of directors, will join Valeant's board following the close of
the deal.
    The transaction, expected to close in the third quarter, is
subject to closing conditions and regulatory approvals.
    Valeant's legal advisors were Skadden, Arps, Slate, Meagher
& Flom LLP and Osler, Hoskin & Harcourt LLP. Bausch & Lomb was
advised by Cleary Gottlieb Steen & Hamilton LLP. 
    Goldman, Sachs & Co. and J. P. Morgan Securities LLC 
acted as financial advisors to Bausch & Lomb on the deal.
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