Shares of Valeant Pharmaceuticals International Inc. (VRX) are popping today after the company announced the sale of its iNova Pharmaceuticals unit for $930 million in cash. The company said it will use the proceeds to permanently repay term loan debt on its senior secured credit facility. Shares are up nearly 10 percent on this news.
Does something seem strange? It was just April 5 when Valeant shares fell sharply amid reports it was having a hard time selling the iNova business for $1 billion. At the time, bids were reported to be around the $900 million mark. (See also: Valeant Pharma Is In Hat-Size Territory.)
It's funny how short-term oriented the market is, and much of investing is about expectations. iNova gets sold today for $930 million, and the stock jumps, even though the sale price is still below the $1 billion that was initially sought.
The $70 million difference at the end of the day doesn't help Valeant all that much in reality. As of March 31, the company had total non-current portion of long-term debt of $28.198 billion. The senior secured credit facility has two debts outstanding which total approximately $7.2 billion. There is currently a $500 million unsecured note at 6.75 percent senior due August 2018. The other maturities are all due after March 2020 until April 2025.
Although the sale of iNova is nice and helps Valeant continue to reduce its debt, it is still a tremendous burden on the company, one that does not get easier, as revenue has been slipping. Declining revenue will make the burden of paying down that debt all the more challenging. The one benefit Valeant has going for it presently is that it has some breathing room until the next maturity dates.
As of the quarter ended March 31, the company had an interest expense of $474 million, which increased 11 percent from the previous year. Those quarterly interest payments have been rising over the past few years.
Reaching nearly $2 billion over the trailing 12 months.
The sale of the iNOVA business certainly helps to bring down that debt level some, but it isn't a significant amount and does not reduce the debt materially. Additionally, the stock seems to be popping more on the relief that Valeant just made the sale more so than the price of the sale, considering that just 2 months ago the price would likely have been a disappointment.
The market has a very short-term memory.
Michael Kramer is the Founder and Portfolio Manager of Mott Capital Management LLC, a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendation made during the past twelve months. Past performance is not indicative of future performance.