Bausch healthcare companies (NYSE: BHC) is a $2.7 billion market capitalization company with an attractive equity stake of approximately 88.75% in the $6.1 billion market capitalization Bausch + Lomb (BLCO). Bausch Health also makes $3 billion in EBITDA. Before anyone rushes to buy, they need to realize that the company also has $21 billion in long-term consolidated debt.
This company is a so-called equity stub. Small shifts in the company’s outlook will swing the stock price wildly. It’s also a complicated business that evolved from fallen angel Valeant Pharmaceuticals.
The 88.75% stake in BLCO is very attractive as the company intends to sell (most of) this stake to shareholders. He’s already invested most of that stake in a subsidiary and wants to divest it once BHC meets a few stand-alone viability standards, like a 2-1 fixed charge coverage ratio and less than 6.5-6.7x adjusted EBITDA. . The company will not sell the entire stake because I believe it owns 10% directly on the balance sheet. He could monetize this stake by selling it on the open market. He could use the proceeds to reduce debt, for example.
If BHC distributes the BLCO shares, it’s incredibly interesting because if BHC distributes all but 10% of the BLCO shares, it means that all BHC shareholders receive a prorated equivalent of $4.76 billion worth of BLCO shares. This is more than the value of all BHC shares currently. Meanwhile, shareholders would still have their BHC shares.
This financial engineering is not ideal for bondholders, and for example, the Bausch Health Companies Inc. 5.25% 19/30 bond trades at a bid-ask spread of 30 and 40 cents on the dollar. . Debt is also under severe pressure due to the drastic change in Fed policy since November 2021. Whatever the reason for the large discount to face value, the company is taking the opportunity to repay its debt. on the free market. In June 2022, the company retired outstanding unsecured senior notes with a face value of $481 million for only ~$300 million. Almost all of BHC’s debt is fixed rate (85%), and I expect the Fed to continue raising rates. This should negatively affect the value of BHC’s debt and make debt repayment even cheaper. Repaying the debt also makes it easier for the company to meet the standards it applies in deciding whether or not to dispose of the remaining shares of BHC.
Before counting on Bausch Health to distribute BCO’s stake soon, consider that the company transferred a roughly 38% stake to another subsidiary on Aug. 22. On August 30, it appears to have borrowed through this subsidiary. This suggests to me that fallout is more likely to occur in a multi-step process. This decision probably increased the chances of seeing a partial recovery in the short to medium term, but decreased the chances of a full recovery in the medium term.
A spin-off of a 40% stake in BLCO is still $2.44 billion in value. Considering BHC’s market cap of $2.7 billion, that’s still very attractive. I think the market has given up on BHC a bit, realizing a (partial) payback soon. The stock fell significantly due to a potentially serious longer-term issue with leading cash flow generator Xifaxan (due to generic competition). But the company seems to think that won’t be a problem until at least 2029. He got some back afterwards, but it still seems very cheap considering the potential fallout.
But Bausch Health now has $19.3 billion in net debt (without BLCO). The latest forecast update speaks of approximately $2.28 billion in adjusted EBITDA. If I multiply that by 6.7, I get $15.276 billion.
Around this level of leverage, it is more likely that BHC will make a fallout. The only way to get there fast is to sell or IPO Solta. The latter is something the company has tried in order to raise a few billion. But he backtracked due to the poor market environment.
The company also owns 10% of the shares of BLCO. The company can sell those 125 after BLCO’s IPO and get its hands on some $600 million. This is all the more interesting since BLCO can go into debt at a price lower than its face value. It could, for example, contract a debt of 900 million dollars. Their ability to take on debt at a lower cost could be amplified by new measures from the Fed. Cash flow has a similar beneficial multiplier. As debt is contracted, the calculation of debt to EBITDA is significantly impacted. Here is a hypothetical scenario. What if BHC sold the aforementioned $600 million stake in BLCO and generated $600 million in free cash flow next year. He then uses it to go into debt at 35% of face value. This could reduce the debt to around $15.9 billion. Both Salix and Solta are growth assets with very high margin profiles. It’s not inconceivable that EBITDA will pick up (not to mention inflation) next year. This could put the company in the debt/adjusted EBITDA ratios it seeks.
Admittedly, this is a very favorable scenario with no major setbacks. But it’s also possible that the company could sell some assets (like Solta) and reach comfortable ratios sooner.
BHC is a highly volatile stock heel. The strategic spin-off plan of BLCO shares (partially) makes it very attractive. As this scenario becomes reality, it should propel BHC shares higher in value. Overall, I think it’s worth exposing here, as the company’s deleveraging trajectory and targets seem achievable and there’s plenty of upside potential. I see inflation and rate hikes as somewhat supportive for the business as well.