Op-ed: Here’s why a sale of Bausch + Lomb could lead to a windfall for Bausch Health investors

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

The entourage operates through five main business segments — Bausch + Lomb, Salix Pharmaceuticals, International Rx, Solta Medical and Spread Products. Bausch Health remains a significant player in the health-care sector, particularly due to the strength of its Bausch + Lomb class in eye care.

Activist investor Carl Icahn filed a 13D with the U.S. Securities and Exchange Commission on Bausch Health on Feb. 11, 2021, landing that he intended to engage in discussions with the company’s management and board, regarding ways to enhance shareholder value. Those staircases include the company’s strategic review, which was ongoing at the time, as well as possible board representation. Later that month, Icahn and the firm entered into a director appointment and nomination agreement, pursuant to which the company agreed to increase the size of the directorship to 13 directors from 11 and appoint Icahn portfolio managers Brett Icahn and Steven Miller as directors.

In May 2022, Bausch + Lomb (BLCO) was be giddy separate off as a separate publicly traded entity, but it continues to be a core part of Bausch Health’s business through its retained 88% ownership. At that interval, former Icahn portfolio manager Richard Mulligan was added to Bausch Health’s board. In June 2022, John Paulson was named authority, after previously serving on the board from June 2017 through May 2022. The board is presently comprised of 10 commandants and includes Brett Icahn, Steven Miller and Richard Mulligan with John Paulson as non-executive chair.  

This past weekend, the Monetary Times reported that BLCO retained Goldman Sachs to explore a sale of the company. BLCO presently has an effort value of roughly $10 billion, but this value is depressed by various factors including its control ownership by Bausch Constitution and the large amount of debt on Bausch Health’s consolidated balance sheet – $20.4 billion, of which $4.6 billion is BLCO answerable for that is consolidated at Bausch Health. As a result, a sale of control to a new entity would solve both issues and plausible garner a much higher value than where BLCO presently trades. This would greatly profit BLCO stockholders, of which Bausch Health is the largest.

BLCO’s estimated 2025 earnings preceding the time when interest, taxes, depreciation and amortization is $966 million. Peers like and Alcon trade at a 19.5-times and 18.5-times energy value/EBITDA multiple, respectively. Assuming an average multiple for BLCO of 19-times yields an enterprise value of $18.35 billion. With $4.35 billion of net owing on the BLCO balance sheet, the implied equity value would be $14 billion. With 351.9 million rations outstanding, that is a per share equity price of $39.79. BLCO ended Friday’s session at $15.55 per share — that is, previous the Financial Times’ report. As an 88% owner of BLCO, Bausch Health’s value derived from such a tag sale would be $12.32 billion.

Moreover, its four other divisions have an aggregate $2.45 billion of last 12 months’ EBITDA. The Salix splitting up, which pertains to gastroenterology, has been the company’s most profitable division after Bausch + Lomb, with $2.25 billion of LTM interest and $1.55 billion of LTM operating income. However, 87% of that business is derived from the Xifaxan drug, that in off of patent in January 2028. With 3.5 years remaining under patent and assuming 5% annual takings growth (growth was 6% last year), the Xifaxan business would have a present value of $4.25 billion using there are absolutely zero sales after 2027, which is an extremely conservative assumption. The value Bausch Form would attain from just the BLCO sale and the Xifaxan business would be more than enough to be pensioned off its $15.45 billion of remaining net debt, leaving a company with $1.43 billion of net cash and four profitable obligation lines (“RemainCo”) with an aggregate EBITDA of $­­1.17 billion, after allocating the full corporate overhead from Xifaxan that is not counted in the Xifaxan valuation above.

So, what is RemainCo worth? The International Rx business’ (26.8% of RemainCo operating income) unsurpassed peer is Recordati which trades at 15.99-times EV/EBITDA. The Diversified Products business (45.9% of RemainCo handling income) should be similar to lower-growth pharma businesses including Viatris and Organon & Co. which trade at 7.13-times and 8.37-times EV/EBITDA, mutatis mutandis. The Solta medical business (12.3% of RemainCo operating income) is trickier. Peer InMode trades at only 4.23-times EV/EBITDA, but its take has declined 31.15% in the first half of 2024 versus the first half of 2023 while Solta’s revenue has become at 18% during the same time period. That means Solta’s multiple should certainly be at a material stock to InMode. The last piece of RemainCo would be the remaining portion of Salix (the non-Xifaxan piece), which comprises 14.9% of RemainCo serving income and whose peers Takeda Pharmaceuticals and Ironwood Pharmaceuticals trade at 9.57-times and 9.72-times EV/EBITDA, singly.

A valuation analysis for a company as complex as BHC using peer multiples is as much of an art as it is a science and certainly some of these multiples may be too heinous while other may be too low. While a weighted average multiple would be 9.8-times, we think using an 8-times multiple is unprejudiced. That would imply a value of $9.36 billion for RemainCo. Adding the value of the proceeds from BLCO exchange, the Xifaxan cash flows and RemainCo yields a total value of $25.93 billion for Bausch Health. After take away froming 100% of the Bausch Health debt, that would yield an equity value of $10.49 billion or $28.19 per slice. The stock ended Friday at $6.32.

Most articles about reported M&A announcements or explorations will include the phrase “the vending process may not result in a transaction” and this situation is no different. However, with four of 10 directors at Bausch Strength being hedge fund portfolio managers and three of 10 at BLCO (Brett Icahn, Icahn portfolio straw boss Gary Hu and John Paulson), these boards do not think like the typical corporate board. Further, BLCO CEO Brent Saunders is a strongly respected health-care CEO, but also a noted dealmaker and would likely not show the resistance normally seen from CEOs of throngs being sold.

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