Valeant Pharma buys PE owned Bausch & Lomb in $8.7bn deal


Financier Worldwide Magazine

July 2013 Issue

July 2013 Issue

On 27 May Valeant Pharmaceuticals International Inc. announced that it had entered into a definitive agreement to acquire Bausch and Lomb from private equity firm Warburg Pincus LLC for $8.7bn. The acquisition of Bausch & Lomb is Valeant’s largest purchase to date.

Valeant expects the deal, which has been unanimously approved by the boards of both companies, to close in the third quarter. At the time of writing, the transaction is still subject to the usual closing conditions and regulatory approvals. Unlike some previous deals Valeant have struck, Bausch & Lomb will retain the company’s brand and divisions. 

The acquisition will help Valeant, Canada’s largest drug manufacturer, compete globally in the growing, specialised ophthalmology market as well as providing the company with large scale operations in China and other emerging markets where previously it had no presence.

Following the announcement of the deal, Valeant’s chief executive Michael Pearson noted that the transaction will place the company among the 15 largest global pharmaceutical companies.

Under the terms of the deal, Valeant will pay an aggregate consideration of $8.7bn in cash for Bausch & Lomb. Roughly $4.5bn of the fee will be paid to the Warburg led investment group which took Bausch and Lomb private in a leveraged deal worth around $4.6bn, including $830m in debt, in 2007. Warburg, Bank of America, Citi Bank, Credit Suisse and JP Morgan Venture provided around $1.9bn in equity for the deal. Warburg, which held an 87 percent stake in Bausch, will likely receive around $3.9bn from the sale to Valeant. Approximately $4.2bn of the cash will be used to repay Bausch & Lomb’s outstanding debts.

Warburg had been pursuing a dual track process for divesting Bausch and Lomb; indeed, the company was put up for sale early in 2013 with Warburg seeking around $10bn. However, as many potential buyers baulked at the price tag, Bausch registered for an IPO in March. Warburg ultimately chose to pursue the sale as it would allow the firm to exit its investment more quickly than an IPO. Analysts have suggested that Warburg will see its initial investment in Bausch & Lomb tripled by the sale, although the firm has not confirmed this. Warburg’s investment in 159 year old Bausch & Lomb came out of the firm’s ninth fund, which raised $8bn in 2005.

The acquisition of Bausch & Lomb by Valeant will be financed with debt and approximately $1.5bn to $2bn of new equity. Equally, Valeant secured fully committed debt financing from Goldman Sachs Bank USA.

Valeant expects to achieve savings of at least $800m in annual costs by the end of 2014. In all likelihood these costs will be achieved via job cuts. Once the deal has been completed Valeant will employ around 18,000 members of staff in over 100 countries, and there will undoubtedly be some crossover and duplication among a number of job roles. Valeant will also look for savings in both purchasing and legal costs. Bausch & Lomb currently spends about 40 percent of its revenue on selling, general and administrative expenses, and Valeant hopes to reduce that figure to around 20 percent.

Quebecbased Valeant intends to retain all three units of Bausch & Lomb’s business, namely contact lenses, pharmaceuticals and surgical instruments. The deal will see Valeant’s existing ophthalmology businesses integrated into the Bausch & Lomb division, creating a global eye healthcare powerhouse with estimated pro forma net revenue of more than $3.5bn for 2013. The majority of that revenue is expected to be generated by Bausch & Lomb, which anticipates revenues of around $3.3bn for the year. Bausch & Lomb expects adjusted earnings before interest, taxes, depreciation and amortisation (EBITDA) of about $720m. 

Taking into account the equity raised to fund the deal, and the strong run of acquisitions Valeant has undertaken in recent years, once the deal has been completed the company’s debt to pro forma adjusted EBITDA ratio is projected to be approximately 4.6 times. However, by the second half of 2014, Bausch & Lomb’s aforementioned strong cash flow and EBITDA is expected to bring the ratio back under four times. 

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Richard Summerfield

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