Valeant Pharmaceuticals Intl Inc (NYSE:VRX) continues its freefall, breaking below $10 for the first time in over a decade. This latest drop comes after bad news in the company’s asset sale initiative.
iNova, Valeant’s Australian subsidiary, is failing to attract high-dollar offers from potential buyers. With mandatory debt payments on the horizon, along with eroding EBITDA and cash flow, Valeant may need to sell assets like iNova if it wants to survive.
Despite the overall weakness in Valeant, iNova looks to be a high growth, valuable asset. If Valeant can’t sell iNova for the price it wants, it will simply keep the business.
Valeant’s management has provided guidance of $3.5-3.7 billion EBITDA for 2017. Free cash flow can be expected to come in a little over $1.5 billion if the current trend continues. The problem is that Valeant’s cash flow is not enough to cover the company’s mandatory debt payments.
To make up the difference, Valeant has three good options; each option has its strengths and weaknesses. The first two options have already been used to some degree of success.
- Refinance the Debt – Valeant issues more debt to pay down the principal of the debt it already owes, giving it more time to turn around. However, interest expense may increase as creditors demand higher coupon payments for higher risk. Eventually, lenders may feel that Valeant is too risky for lending.
- Sell Assets – Valeant divests around $8b in non-core asset sales. Divestitures can, not only provide liquidity, but also reduce the complexity and overhead of the business. However, this is an imperfect strategy because it will come at the cost of EBITDA and cash flow.
- Sell Stock – Valeant uses its last resort and does a dilutive capital raise. Valeant has traditionally refrained from dilution because of its investor-driven company culture. As a result, Valeant’s capital structure is overburdened with debt. The downside is that selling stock at this price would wipe out current shareholders. But it will probably be the best way for Valeant to avoid liquidation with its growth drivers intact.
Why Sell iNova?
iNova is an Australia-based healthcare business that sells over-the-counter and prescription products in Southeast Asia, South Africa, and Australasia. Valeant acquired iNova in 2011 for $625 million. iNova is garnering acquisition interest from firms like Mundipharma and various private equity groups. However, reports suggest the offers are coming in below Valeant’s intended selling price of around $1 billion.
According to Fortune, the segment generates $100 million in sales per year.
At an EBITDA margin of 40%, iNova can be assumed to generate around $40 million in annual EBITDA for Valeant. Selling the business for $1 billion would give it an EBITDA multiple of 25. Such a high multiple suggests that iNova is a super high growth segment that is worth keeping if no one is willing to pay up.
Valeant doesn’t look like it will have the cash flow to service its required debt payments in the future. And it has three options for coming up with the cash it needs: debt refinancing, asset sales, and equity dilution. So far, Valeant has refinanced some of it debt and aims to make the difference with asset sales.
If Valeant can’t sell iNova for the price it wants, it may decide to keep the business. Even though iNova is a non-core asset, its $100 million in sales is nothing to scoff at.
Either way, regardless of what Valeant chooses to do with iNova, the business can certainly be counted among Valeant’s more successful acquisitions.
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