Bausch Health Companies (BHC, Financial) (TSX:BHC, Financial), which is dual listed in the U.S. and Canada, is planning on splitting into three companies this year - Bausch+Lomb, Solta Medical and Bausch Pharma. The main event is the Bausch+Lomb spinoff, in my view; it seems like the split is aimed at making Bausch+Lomb into an investment-worthy company.
Bausch Health (formerly known as Valeant) has filed a prospectus detailing the split. It intends to separate the eye care business and call it Bausch+Lomb. Bausch+Lomb is planned to be listed in the New York Stock Exchange (NYSE) and the Toronto Stock Exchange (TSX) under the symbol BLCO.
History
Valeant's former CEO Michael Pearson (a former McKinsey consultant) had bought the Bausch+Lomb business from private equity firm Warburg Pincus LLC for $8.7 billion in 2013. Warburg Pincus had taken the firm private in 2007 for $3.7 billion. Now it is coming back into the public market on its own after trading under the Bausch Health umbrella.
When it was Valeant, the company went through a frenzy of debt-fueled M&A, often ridiculously overpaying for assets. Pearson was ousted in 2016 after a failed hostile takeover attempt of Allergan and a drug price scandal. Valeant's modus operendi was to hike the prices of sole source drugs to unconscionable levels after taking over the companies to pay for the expensive M&A. Since the U.S., unlike most other developed countries, have no price controls on drugs, this worked well for a while, until the system started breaking down and the company got embroiled in political fall-out. The stock price crashed, and Pearson and his executive team of M&A artists and financial engineers exited unceremoniously.
After Pearson left, Joseph Papa, the current CEO, was bought in to clean up the mess. Bausch Health had built up a massive amount of debt on its balance sheet, which is weighing on its stock price. While Papa has reduced debt by selling off assets, it is still quite overwhelming, and the company now has negative equity. The spinoffs are the final steps in restructuring the business, and are at its core an equity raise, where debt is paid down with new equity. The hope is that the new capital structure is more attractive to investors.
In 2020, Bausch Health said it planned to spin off the faster growing eye care business from its pharmaceutical operations. It seems like that plan is finally being set in motion. Bausch Health plans to sell Bausch+Lomb shares through its wholly owned subsidiary, which will retain all proceeds from the sale and is expected to use most of the funds to pay down debt. Bausch Health will remain a majority owner of the new public company.
Bausch+Lomb
Founded in 1853, Bausch+Lomb is an iconic name in eye care. The company invented Ray-Ban sunglasses for military pilots and later introduced some of the first mass-produced soft contact lenses and contact-lens solutions. It also makes surgical instruments and devices. Opthalmic devices and drugs operate in an oligopolistic market with just a few players and high barriers to entry.
Bausch+Lomb made $2.7 billion in revenue in the nine months ended Sept. 30, 2021, and $131 million in profit. In 2020, it generated $3.41 billion in revenue and in 2019, it had $3.78 billion.
As a stand-alone entity, Bausch+Lomb is expected to be valued much higher than now, when its part of the larger Bausch Health. Many prominent guru investors have already positioned themselves to participate in the expected re-valuation by purchasing shares of Bausch Health, as shown in the below chart:
| Guru | Portfolio Date | Current Shares | % of Shares outstanding | % of Total Assets Managed | Comment |
| Carl Icahn | 2021-09-30 | 34,109,152 | 9.49 | 4.22% | |
| John Paulson | 2021-09-30 | 25,839,035 | 7.19 | 20.50% | |
| ValueAct Holdings LP | 2021-09-30 | 17,941,603 | 4.99 | 5.79% | |
| Larry Robbins | 2021-12-09 | 17,078,657 | 4.75 | 7.70% | Add 9.13% |
Valuation
Comparable eye-care companies like Alcon Inc. (ALC, Financial) (which itself was separated from Novartis (NVS)) and The Cooper Companies Inc. (COO, Financial) are valued much higher than Bausch Health is now:
| Ticker | Company | Price | Market Cap($M) | EnterpriseValue ($M) | Revenue($M) | Cash Flow fromOperations | Free CashFlow | PE Ratio | PB Ratio | PS Ratio | Price-to-Operating-Cash-Flow | Price-to-Free-Cash-Flow | Price-to-Tangible-Book |
| TSX:BHC | Bausch Health Companies Inc | 33.94 | 9,714.16 | 31,304.20 | 8,461.81 | 2,258.82 | 1,901.38 | At Loss | 0 | 1.15 | 5.40 | 6.42 | -0.48 |
| ALC | Alcon Inc | 78.59 | 38,288.22 | 41,063.32 | 8,082 | 1,397 | 322 | 117.20 | 2.01 | 4.79 | 27.82 | 120.52 | 29.43 |
| COO | The Cooper Companies Inc | 410.52 | 20,282.98 | 21,933.48 | 2,922.50 | 738.60 | 524.20 | 6.93 | 2.92 | 7 | 27.69 | 39.02 | 6.54 |
Looking at the price-sales ratio, Bausch+Lomb alone with sales of $3.7 billion, if it were valued at the same price-sales ratio as Alcon, could command a market cap of $17.72 billion. This is nearly twice the market cap of Bausch Health currently. Plus, we still have the remaining Bausch pharmaceutical business and the dermatological and aesthetic medical devices business (called Solta, which is also being spun off in a second concurrent deal).
While the revaluation of these spinoffs by the market will not happen overnight, I think it is very much possible in the next three to five years. Therefore, I think Bausch+Lomb has the potential to be a multi-bagger in a few years.
Bausch Health's remaining pharmaceutical business will de-lever significantly using the funds obtained from the spinoffs. This should help improve the valuation of the remaining stub as well. Bausch+Lomb's net leverage target is less than 2.5 times, while Bausch Pharma's net leverage target is 6.5 to 6.7 times. Currently BHC's debt to EBITDA multiple is over 13 times.
