In January earlier this year, I wrote an article on Bausch Health Companies (BHC, Financial), in which I speculated that the upcoming spin-off of the Bausch + Lomb eye care business and its aesthetic business (named Solta) would unlock tremendous value. After publishing that article, I invested in the stock. Bausch was to split into three businesses:
- The eye-care business, Bausch + Lomb Corp. (BLCO, Financial).
- The aesthetic businesses, Solta, would be separated via an IPO.
- The pharmaceutical business (and other remaining businesses) would continue as Bausch Health Companies.
But the best laid plans often go awry. While Bausch executed an IPO of the Bausch + Lomb business, a combination of weak first-quarter earnings and the bear market has hit it like a freight train. Just look at the carnage. The stock price is down 73% this year!
Bausch's IPO of Bausch + Lomb was on May 6, with shares of the contact lens and eye-care company opening trading at $18.50 after selling 10% of the total shares for $18 in the IPO. The IPO was for less than the previously expected price of $21 to $24 a share given weak market conditions. The IPO proceeds (about $600 million) will be used by Bausch for debt reduction. The parent company also plans to sell another 10% of Bausch + Lomb stock and then spin off 80% of the remaining to shareholders. As of right now, Bausch Health owns 90% of Bausch + Lomb. Given market conditions, the Solta IPO has been put on hold.
Here are how the two stocks have fared side-by-side since the spinoff:
Even though both stocks are down, Bausch Health is down far more, even though it owns 90% of Bausch + Lomb. Bausch Health's market cap is $2.7 billion, while Bausch + Lomb's market cap it $5.5 billion. This means the Bausch Health shares are selling for a negative amount of money if you back out the 90% of Bausch + Lomb it owns. Mr. Market's logic does not make much sense to me, in that it is valuing Bausch Health's pharmaceutical business far below zero.
While the remaining pharma business is heavily leveraged, logic dictates that equity value cannot be below zero. Therefore, even if we were to ascribe a zero value for the remaining company after separation, the 80% of Bausch + Lomb stock which Bausch Health will eventually offload should be worth $4.4 billion.
This also does not account for the fact that Bausch + Lomb itself looks undervalued as compared to its eye-care peers like Alcon (ALC) and The Cooper Company (COO). For Bausch Health, perhaps a zero value is appropriate given the huge debt load it is carrying. After the spinoff is completed, any market value ascribed to the remaining company's equity is expected to be small and highly speculative.
However, Bausch faces several unresolved shareholder lawsuits and there is a possibility that the spinoff could be declared an illegal transfer to avoid liability. A group of investors are already suing the company accusing it of fraudulent transfer of assets. The lawsuit could have a dampening effect on the stock price, but it is likely a settlement will be reached.
There are some important Gurus who are long Bausch Health, including Carl Icahn (Trades, Portfolio), so this is not some orphan stock.
| Guru | Portfolio Date | Current Shares | % of Shares outstanding | % of Total Assets Managed | Comment |
| Carl Icahn | 2022-03-31 | 34,721,118 | 9.61 | 3.63% | |
| John Paulson | 2022-03-31 | 25,839,035 | 7.15 | 18.18% | |
| ValueAct Holdings LP | 2022-03-31 | 14,430,901 | 3.99 | 4.54% | Reduce -7.59% |
| Larry Robbins | 2022-03-31 | 9,256,661 | 2.56 | 4.28% | Reduce -25.96% |
Charlie Munger (Trades, Portfolio) once said that If you’re going to be in this game for the long pull, which is the way to do it, you better be able to handle a 50% decline without fussing too much about it. Well, this is much more than a 50% decline, so I am a little fussed. So, what do I do? In this particular case, I bought more. The market action does not make sense, and from my perspective, the fundamentals have not changed from when I previously formed my investing thesis on this stock.
Francis Chou (Trades, Portfolio) had the following to say about this stock in his 2021 semi-annual letter:
"Comparable companies like Cooper Companies (COO) and Alcon Inc. (ALC) are currently trading between 18 and 20 times 2022 EBITDA estimates and 25-30 times trailing EBITDA estimates. If Bausch + Lomb trades at similar multiples as a stand-alone company, the total value of Bausch Health using a sum-of-the-parts method would be worth north of US$45 per share (net of debt)."
Bausch Health was a big mess when the current CEO Joseph Papa took over in April 2016. The stock was trading at around $30 at that time. The company has reduced long-term debt from about $30 billion to $23 billion now and is aiming to bring it down to $20 billion when the Bausch + Lomb and Solta separations are complete. Unfortunately, the company got caught flat footed by the current bear market and will have to wait a while before the separation. The stock is ~$7 now, in spite of clear fundamental improvements.
