Investors who have been following the Salix Pharmaceuticals acquisition saga may immediately recognize this is actually slightly less than the deal Endo brought to the table last week, which implied an offer of about $175 per share of SLXP.
What gives? Valeant Pharmaceuticals is making an all-cash offer, while Endo International was offering $45 per share of SLXP in cash — the rest of the $175 was payable as ENDP shares.
The choice between cash and shares of Endo International was a no-brainer, even to Endo (which retracted its offer shortly after Valeant Pharmaceuticals upped the ante.
The $64,000-question owners of all three stocks are asking at this point is — now what?
This Offer for Salix Isn’t Apt to be Trumped
It’s a story that almost sounds like the beginning of a John Grisham novel.
Valeant Pharmaceuticals made its first offer for Endo International back on Feb. 21, saying it would pay $10.1 billion for Salix, or $158 per share of ENDP.
It looked like a done deal too, until March 11. That’s when Endo International offered, by e-mail, a deal for Salix Pharmaceuticals that included a payment of $45 in cash and 1.46 shares of ENDP for every share of SLXP, translating into a bid of about $175 per share at the time, with an assurance from Endo that the deal could be closed quickly.
The Endo offer looked like a done deal too, until Monday morning. That’s when Valeant Pharmaceuticals came back with an offer of $173 in cash per share of ENDP, payable just as soon as Valeant could work out all the legal and financing paperwork. This all-cash deal was one just too good for SLXP owners to pass up, so they didn’t.
Endo International knew it was licked too, bowing out rather than even entertaining the possibility of another counter-offer.
Did Valeant Really Win by Winning?
Congratulations are in order… technically. Valeant Pharmaceuticals won Salix, but must borrow money or issue shares to fund the purchase of Salix Pharmaceuticals.
Fans and supporters of the acquisition will argue that the deal brings a new revenue-bearing portfolio of drugs under the Valeant umbrella, including two potential home-run drugs in the pipeline — Xifaxan and an oral version of Relistor. Xifaxan is up for approval as a treatment for IBS-D, while an oral Relistor will broaden its marketability to opioid-induced constipation sufferers.
Still, even if an oral Relistor and more approved uses for Xifaxan end up being home runs, Valeant Pharmaceuticals paid a pretty penny for the company. Salix Pharmaceuticals generated $1.1 billion in revenue last year, and is projected to drive $1.3 billion in sales this year. Valeant Pharmaceuticals just offered 8.5 times this year’s likely sales to buy SLXP.
It better be worth it in the foreseeable future, as observers and some VRX shareholders are becoming increasingly worried about all the debt-driven acquisitions Valeant has made of late under the direction of hedge fund manager and major VRX shareholder Bill Ackman.
Vicki Bryan, bond analyst for Gimme Credit, noted of Valeant after the February offer was made to acquire all the outstanding shares of SLXP.
“The deal will be funded by a massive increase in debt… marked uncertainty coming with its newest very expensive and very problematic acquisitions, Valeant might be lucky to hit the low end of its revenue and profit targets in 2015.”
And interestingly, Valeant itself reportedly said in December it was going to lay low on the mergers and acquisitions front for a couple of quarters while it paid down some of its debt, tacitly acknowledging the company knew its debt levels were getting unwieldy. Now Valeant is now looking to make its biggest-ever acquisition.
Bottom Line for VRX, SLXP and ENDP
The real winners here are obviously owners of SLXP shares, who are — frankly — pocketing a premium that may not have been paid by any other suitor under any circumstances. And, ENDP shareholders won in the sense that Endo International didn’t overpay for an acquisition.
Ironically, the losers in this deal may ultimately be shareholders of the company that won the bidding war. Salix has a solid portfolio and pipeline to be sure, but it remains to be seen if it’s worth $11.1 billion.
In the meantime, rumors that the company is seeking to fund the deal privately (most likely through Bill Ackman) suggests Valeant knows public creditors and investors aren’t thrilled with the company’s balance sheet.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.