Watching Bill Ackman Wild Ride in Emails To Valeant Pharmaceuticals Intl Inc (VRX) CEO Is Classic
Valeant Pharmaceuticals Intl Inc (NYSE:VRX) shares are trading nearly one-tenth of its one-year peak price. One of the biggest supporters of the company was the hedge fund manager Bill Ackman, who heads Pershing Square Capital. As the company’s stock nose-dived, the value of the investments also took a severe beating. The loss should be more than a billion American dollars. The main cause of the significant drop came after Hillary Clinton commented about the pharmaceutical firms charging the drugs higher. Aside from that, the United States Senate has released the emails sent by the activist investors to the former CEO, Mike Pearson, and other related ones. There were series of communications between him and the ex-CEO on different topics. Now, he is compelled to explain himself to different people including the current CEO, Joseph Papa. The emails part of a large batch provided interesting insight into the frustrations and trails and tribulations Ackman experienced during his investment in Valeant.
What To Do Next
The activist investor, Bill Ackman, had some thoughts about what Valeant Pharmaceuticals Intl Inc (NYSE:VRX) should do next. Some of his plans included an IPO of its subsidiary, Bausch & Lomb. He urged Pearson to go public with his plans for the IPO. He also wanted divestment of the dermatology unit. Such comments were aired through email to the then CEO. Those emails have come to light now as the US Senate Committee on Aging published an 818-page document. That provided the conversations through mails among the different parties. Everyone concerned, be it the company or the key officials of the company and the activist investor, were under the SEC scanner for one or the other thing. Interestingly, Ackman joined the company’s board only on March 21 last.
As part of expressing his opinion or thoughts to Valeant Pharmaceuticals Intl Inc (NYSE:VRX), Ackman suggested to Pearson on March 3 that the company commence a preliminary review of divesting a maximum of 20% stake in Bausch & Lomb. He urged him to disclose the issue during an upcoming earnings conference call. He pointed out that the announcement in respect of a transaction was extremely well-received by the company’s shareholders. The activist investor was preparing to present a possible positive catalyst meant for debt pay down apart from value recognition in the current year. Obviously, he wanted to provide investors a reason to continue to hold the stock and see some optimism in the value of their holdings.
Favoring Of IPO
Ackman urged Valeant Pharmaceuticals Intl Inc (NYSE:VRX) to opt for an IPO citing the gains to be derived from the transaction. His contention was that generating cash from a transaction, which was not dilutive to it, could be used to speed up paying down its debt. According to his calculation, B&L should have traded at more than 20+ times earnings similar to the situation when it went public. The second factor that he cited was the importance of the value that the company could establish after acquiring B&L. The third point he made in favor of the IPO was that it would demonstrate some of the intrinsic value that came up with it. He believed that investors would resort to deducting the value of B&L from the primary company to find that they were only paying little for the other businesses.
Aside from that, the activist investor pointed out to Valeant Pharmaceuticals Intl Inc (NYSE:VRX) that it could retain gains as the team of B&L could be compensated depending on the stock price movement. The fifth point was that it would enable B&L to use the currency for acquisition purposes. Incidentally, Valeant has been growing through the acquisition mode only. That also meant that some of the investors shying away from investing it. For that purpose, Ackman said that the issuance of the shares would be a tax free to the company and provided an opportunity to invest in it to those who were avoiding Valeant. He said that the accelerated debt paydown would be a comforting one to its equity, as well as, debt investors. As a result, the activist investor expected to attract fresh investors to the counter to boost its price. On top of everything, he was confident that the move would have reemphasized its strong shareholder orientation and value creation for the shareholders. However, nothing has fructified and there is no possibility of an IPO now.
Stake Trimmed For “Tax Reasons” Last Year
At the end of December last year, Perishing Square Capital reduced its stake in Valeant Pharmaceuticals Intl Inc (NYSE:VRX) to 8.5%. However, the hedge fund clarified that the move was purely a tax-related one and meant to plan for the year-end tax purposes. That was to record tax loss for two of its funds. The general belief was that locking a loss should enable investors to compensate profits in other stocks and reduce their taxes for the year. The significant factor was that only a month after it increased its stake to 9.9% taking advantage of the sharply dropped stock.
As of March 8, Pershing Square owned about 30.7 million shares. The holding suggested that the hedge fund might have lost $1 billion as the Valeant Pharmaceuticals Intl Inc (NYSE:VRX) shares plummeted 89.4% from the 52-week price of $263.81. Ackman has made it very clear that he was not interested in selling his stake and suffers a big loss. Therefore, he said that he was ready to take a more proactive role to not only protect its investment but also maximize the value of its investments. He does not mind changing the management completely if it failed to improve its situation.
As far as Ackman is concerned, one thing is sure. He wants to defend his investments in Valeant Pharmaceuticals Intl Inc (NYSE:VRX). Also, he would push for a split to realize a better value. His entering the board was the first step, and his presence should ensure that investors get a better value to their investments. He would again push for the IPO and divestment.
Valeant has a hard road ahead and will likely continue to be very volatile due to its mountain of debt, which could hold back shareholder returns as it manages through it.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
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