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If Mike Pearson, chief executive of Valeant Pharmaceuticals, wants to pay more than necessary to clinch a deal, he will encounter little resistance. In late February, Valeant announced plans to acquire bowel medicine company Salix Pharmaceutical for $158 per share, or $14.5bn in enterprise value. On Monday it raised its cash bid to $173 per share to counter an offer from smaller drug player Endo (which then dropped its pursuit). But that nominal $175 per share Endo offer looked inferior as it was mostly in shares.
While uncertainty swirled over the Salix bid, Valeant was still able to tap the credit market last week. Shareholders Bill Ackman and ValueAct also signalled their support.
Just as the Endo counter-offer was disclosed, Valeant placed $10bn in high-yield bonds, the third largest junk bond offering in history. It also raised $4bn in term loans. The bonds are due in 5 and 10 years and priced with meagre yields of 5.4 to 6.2 per cent.
Valeant maintains, even with the sweetened offer, that its earnings per share will rise by a fifth in 2016. Salix’s near-term earnings will be depressed by inventory management problems found last autumn. Those problems might have been one reason why Allergan did not proceed with a possible $200 per share bid for Salix back then. If Salix’s underlying business is still worth $200 per share, then a $173 per share buyout price may be a good deal. But Valeant’s ability to offer cash suggests it should not have been so generous — an offer in the $160s might have seen off Endo.
Valeant, on announcing its previous Salix offer, said its net debt would climb to a punchy 6 times earnings before interest, tax, depreciation and amortisation. The extra $1bn it now needs will come from a dilutive equity offering announced late on Monday. Yet, Valeant shares are up 14 per cent since announcing the first Salix offer in February, including a two-point jump on Monday. If capital markets will not worry about bidding discipline, neither will chief executives.
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