Eden Rahim: here’s the real problem with Valeant Pharma’s restructuring

On Thursday, This morning, Valeant Pharma announced it would sell its iNova Pharmaceuticals business to funds advised and managed by Pacific Equity Partners and The Carlyle Group for (U.S.) $930-million in cash.

The sale of iNova is part of the company’s ongoing efforts to both simplify our operating model and strengthen our balance sheet,” said CEO Joseph C. Papa. “We will continue to evaluate opportunities that will enable us to deliver on our commitments and unlock value for shareholders.”

Next Edge Capital’s Eden Rahim was on Bloomberg TV Canada Thursday to talk about Valeant and its most recent deal. The portfolio manager says Valeant’s debt reduction may be a case of a step forward coupled with a step backward.

“They are progressing,” says Rahim. “A year ago they set a goal to reduce their debt by five billion, from about $31-billion to $26-billion, and they are well on their way to that.”

But Rahim says there is one big problem with the way Valeant is restructuring.

The portfolio manager says the company is reducing its actual debt, but the low premiums at which it is selling assets means its debt to EBITDA ratio is actually getting worse.

“Its debt to EBITDA is roughly 8x,” Rahim says. “But when it sells an asset like iNova, it’s selling at around 7.5x. So what effectively happens is, you are selling an earning asset at a lower debt to EBITDA than your balance sheet has. So when that goes away you are effectively leveraging your balance sheet just a bit more. Your absolute debt is coming down, but not your debt to EBITDA.”

“That’s the dilemma Valeant is facing right now,” says Rahim.

At press time, shares of Valeant Pharamceuticals on the TSX were up 1.4 per cent to $17.07.

Disclosure: Cantech Letter Editor Nick Waddell owns shares of Next Edge Capital.