Valeant Pharmaceuticals – The Perils of the Debt Acquisition Model (Video)

Valeant Pharmaceuticals – need a ‘fix it” third party to come in stop the bleeding. Moreover, the current management team is stuck in the deer in headlights mode, and needs to start taking proactive steps to resolve the overhangs that our weighing down investor confidence on the street.

Valeant Pharmaceuticals

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0:00regions this is econ matters its march 19 2016 and we’re going to talk about
0:05 Valeant Pharmaceuticals docked in regards to couple issues a black men and P
0:14their debt issue which is just real good take away business case study so if we
0:21look at Freeport McMoRan right
0:25they have total debt three billion and even though they have operating cash
0:35three point two billion that the reason there when there you can see that
0:46levered free cash flow just really took a hit this past year quarter and that
0:54seemed destined line in mind etcetera and that’s pretty capital-intensive
1:00business in then when their cash to get under question you get short attacks and
1:07think this stock got down to four dollars at one point somewhere around
1:11there
1:12energy energy same thing nineteen billion in total debt
1:20this cost to see his job have operating cash flow 1.3 1,000,000,000 again trying
1:33to be a new
1:35energy
1:41utility company with modern modernizing and two new age if electricity is often
1:51not

Valeant Pharmaceuticals

1:53course they got in this position by acquisition of other utility companies
1:59for the most part but then once they started you know you know in a low
2:08natural gas price environment where their cash flow was taken a hit and they
2:13were spending a massive amount of the way down to $8.80 to value they have
2:28thirty billion in debt and again a strategy of acquiring companies leverage
2:35your debt and even though they have offering cash for 2.5 foresight in so
2:44they have to get cash flow it’s just whenever you’re dead
2:49always open yourself up it looks good when times are good in school you know
2:54that you learn that

Valeant Pharmaceuticals
2:56cost of debt financing from efficiency standpoint is often better than
3:02been doing it shareholders or use cash that you should be you should if you’re
3:11running your company right should have better use of your cash than what you’re
3:16paying on debt financing and so it’s a great model the problem is that when
3:21times are good and when things turn you become Sept susceptible to shark attacks
3:28and so this is what do I faced service a shark attack in his valiant and 2698
3:40just seems like a ridiculous number and so that value creditors are putting
3:52pressure on the farm

Valeant Pharmaceuticals
3:53suitable company for new terms after it said it would miss in March 15 deadline
3:56to file its annual report that would put value risked defaulting on some thirty
4:02billion debt according to exclusive creditors may try to resent the contract
4:08terms with more stringent standards which could ultimately add more Dec
4:11haces restrictions on how well you can spend its capital and that’s not really
4:15an issue the issue is
4:18the somebody want them to go under in my mind if somebody wants to causes
4:24creditors actually a hedged where they could make more money on having them go
4:29under somebody would take them down and seen it too much on wall street where
4:36the incentives are on the wrong side in you can compare this to trucks
4:40bankruptcies a lot of negotiations were hey you know you’re gonna lose more
4:45money if I go bankrupt and cutting deal with me and so it depends on how this is
4:50aligned

Valeant Pharmaceuticals
4:52the other thing is value said its fourth-quarter earnings Tuesday it would
4:58need to filing a potential financial center in my view the 58 million
5:02incorrectly recorded revenues linked to drug strip Deerfield or services this
5:08mistake was found during internal audit I mean we’re talking 58 million ride and
5:16literally the amount of money that their capex their stock has taken a hit on is
5:23just ridiculous so it argues that management is what’s really in question
5:29here and so this brings me to what bill Ackman’s possible solution is here he’s
5:37obviously stuck at this point he thinks and he’s evaluated and probably the
5:41people invested in this runaway costs
5:46disclaim makes no sense to cut losses and then how do we stop the bleeding to
5:53give yourself a chance to have a run on the bank never on any stock and you can
5:58crush any stock and it needs to stop going down first that’s the first
6:02solution and so probably need some kind of investor confidence in I would be
6:08calling anybody that knows me a favor and hedge fund community and get them to
6:14publicly say you know I’m gonna take a stake in this its just overdone and i
6:19think that the stock has fallen too far and this makes long-term investment sure
6:27that may have problems but $26 a share but they need to do this in a public man
6:36and step in and so you know to somebody else in the solid in the business
6:40because it’s no head on down and really at this point of call options some sense
6:48if the business when you get to 26 share
6:51sure can go down to 0 but effectively something going from such a short time
6:57from 272
7:00to $27 a share and is not in doubt material stuff that long-term and I yeah
7:10you can say the politics of it
7:12drug pricing etc but just conservative with health care being such in demand
7:20and the drug business being such and demand just what it’s worth
7:24other companies even if it totally changed your pricing structure on your
7:29drugs and
7:33made some changes in the way to run the company it’s less aggressively from a
7:41pricing standpoint
7:44you gotta think the business value here at least $50 sheer so in some sense I
7:54think this is a call option for
7:57especially if you could play it you know there’s ways you could mitigate yourself
8:06you can even head yourself so somebody wanted to do me a solid they did hedge
8:10themselves so that even they could even do it so their net neutral in the stock
8:16or they have a slight upside with some hedging and they would actually come in
8:23to stop the bleeding caused those stock woodstock going down to get at least a
8:29boost it gets some of the shorts because of the short squeeze who knows what the
8:32short squeeze in this is $10 so that would be one thing that he can do get
8:38somebody to come in another investor and say publicly that
8:42but they would basically be doing him a favor saying he needs somebody to come
8:53in and fix it was obvious in management
8:55there’s no way fifty eight million dollars should even be an issue to cause
9:00of this distressing you’re stuck wondering why they overreacting or is
9:06this a great great issue where maybe they were too aggressive in their word
9:10about the legal implications of this sort of some centres concerning just
9:16incompetent management working in some of the Fortune 500 companies that have
9:20you often think people they’re much better than they are and when you sort
9:26of gas on your own you sort of start evaluating the decisions that they make
9:30from a more independent standpoint you realized that she I could have been
9:34doing that job
9:36there’s nothing special these individuals they just happen to reach
9:40places of power in the organization so the management hope interacting of this
9:48and putting a somebody on the board frankly and frankly bill Ackman sending
9:54some guys and they’ve handled this position don’t know that doesn’t give me
9:59any confident I think they need an outside fixture above its gonna give
10:05them a percent
10:06investment and he gets you know convertible shares like he’s done for
10:11like three or four other firms doing this with so that’s not an option
10:18the other is David voice in the legal community is a fixer right they need a
10:25fixer to come in six Tests and its August not KPMG because this whole grass
10:31wouldn’t be involved right now so they need somebody probably an independent
10:35party mixer to come in and start right-sizing of these mistakes and get
10:42the PR story change real quick because obviously there’s nobody currently at
10:49valiant has the capabilities do it because they literally are deer in
10:53headlights cannot let this happen to your company and days literally should
10:57be working overtime on the weekend trying to figure this out this is just
11:02ridiculous if I was investor in in value
11:07that frankly looking at replacing management replacing
11:17forget board members in attendance at this point
11:23hostile takeover I mean it’s really unbelievable how management is just
11:31screwed this up in you really have to question their competence in the first
11:36place and that’s what has that’s part of the problem is that has investors
11:41worried they’ve been is this company just a complete
11:50unmitigated disaster that this you know where there’s smoke there’s fire and
11:55this is just the beginning when you start digging into the company that
12:01they’ve been assigned a lot more issues so that some of what’s going on with
12:09value I guess best-case scenario is that they’re just not handling the situation
12:22and making it far worse than it actually is
12:26and they’re in there over a sort of due diligence to get here I that they sort
12:36of don’t realize they’re exacerbating the problem right
12:41and hope that’s just what the case the worst cases they actually are that
12:48incompetent and this should have never been a hundred dollars a share company
12:54$270 company per share company and going to zero because they have all kinds of
13:04legal implications
13:11true
13:19picture that can come in and evaluate get things done and really analyze
13:29what’s going on in the company
13:30figure out how to just start making some decisions that wrapped some of these
13:37issues because you can have these over hangs over the stock and that’s what
13:41management just isn’t getting just gotta the uncertainties what’s killing it and
13:47you just got things up I mean how long did it take to possibly do all of this
13:51stuff for two companies hire an outside group it comes in and literally
13:58you if you need to staff up literally there’s like two or three weeks
14:04process where everybody crammed into conference roomed all the available
14:08talent at the company’s brought in and they all analyzed stuff and they get
14:12together and file a report

Valeant Pharmaceuticals
14:15and clean it up I mean I went to pee pee and they had a bunch of these internal
14:21issues so this isn’t a death knell to the company and you just make an
14:26announcement you take me literally their stock would jump if they just said Oh we
14:31incorrectly you know did this for this particular fifty million was improperly
14:41accounted for and we found it we actually are going to report a loss for
14:46this particular period for this winter write this down i mean they would be
14:54better off to write it down if that’s what the issue is then the damage
14:59they’re doing to their stock in the reputation by leaving it unquestionably
15:04out there is some kind of question about what the issue is just killin stock and
15:10so literally all it takes is you hire an outside firm they come in and you get a
15:16do they not have that many team members that can come in and can review the
15:21books and work through all the spreadsheets for two weeks and get this
15:25done there should’ve been done a long time ago that’s what really questions
15:28that they need to bring some outside counsel and maybe this is what bill
15:32Ackman can do you bring in a third party you look at the issue that under
15:36question you put a team on it working weekends night getting pieces pizzas
15:41delivered

Valeant PharmaceuticalsValeant Pharmaceuticals
15:42and you go through all the spreadsheets and then you come out with
15:44recommendations and then you put it out there in move on
15:49whenever the BB did with very similar issue to this there’s no way that this
15:54should come to this where it’s taken this long and such a crippling you know
16:01that’s what question is are outright fraud here and there separable to a
16:06whole bunch of issues down the line and that’s what they’re worried about
16:10that’s not the case then they’re really screwing this up from you know it’s not
16:18the sort of not the event it’s seems like they’re just making the situation
16:23far worse than it needs to be unless it just actually is and it’s not there’s
16:31just no this is not acceptable
16:35management practice the way they’re handling this and so any point bill
16:40Ackman needs to get a third party in there and it’s not KPMG
16:45and start to fix it for this company because all of these issues is like they
16:49can’t make decisions they need to wrap up these things easier problems to be
16:53solved and go on to the next one and go on to the next one going next one I see
16:57that probably have three issues that they need resolving they need a picture
17:01that can come in and get things done because they need the things you’re just
17:04dragging on way too so that’s what I think some jazz options are obviously at
17:15this point he sees himself stuck in this position and so in Review get somebody
17:25to do a solid for an outside investor to invest in the company has long-term
17:31value that I get the shorts off the back and get a popup least tell

Valeant Pharmaceuticals
17:38the company can figure it out then I bring in an outside person not a board
17:43member professional fix it people in the industry and get them to get management
17:48head on straight and and then I start shaping the story
17:54PR standpoint because they need to change the investor confidence and part
17:58of that is a PR story and you can do that by telling the right story to the
18:04street oK so that’s the dangers of debt really good in time when times are good
18:11but because there are always those shark attacks in a few have are investing in a
18:20company with a lot of dead just realize it looks good when the high fires but
18:24you’re absolutely can get crushed if things start going wrong because the
18:29death becomes the sovereignty issue in that sweatshirts just really pile into
18:34and that becomes a common stock can go to do it can go bankruptcy can go you
18:40know defaulting on its debt you’re just really susceptible those things can just
18:45crash so that’s why you should always look at the debt how much you can get
18:52that debt issue

Valeant Pharmaceuticals
18:55and several statistics on a look at the overall number
19:01debt relative to cash and what percentage of their income to debt
19:10payment and then what are possible issues that they could run into down the
19:17line that could strip trim their cash flow that they then could put some of
19:21their debt to pay their debt obligations into question
19:27oK so that’s the story of Valeant Pharmaceuticals and a cautionary tale
19:32debt

Valeant Pharmaceuticals