How Carl Icahn can create worth with this healthcare firm that has plenty of helpful enterprise

Carl Icahn at the 6th Annual CNBC Institutional Investor Delivering Alpha Conference on September 13, 2016.

Heidi Gutman | CNBC

Company: Bausch Health Companies Inc. (BHC)

Bausch Health Companies Inc, formerly Valeant Pharmaceuticals International Inc, is a Canada-based company that develops, manufactures, and markets a range of branded and generic drugs, medical devices, and over-the-counter products. It mainly develops products in the therapeutic areas of eye health, gastroenterology and dermatology. Its dermatology products treat a range of conditions including actinic keratosis, acne, atopic dermatitis, psoriasis, and other dermatoses. It also offers a selection of aesthetic medical devices that treat a wide variety of conditions, including facial wrinkles, acne, pigmentation conditions, and laser hair removal. The Gastrointestinal (GI) segment offers products for the treatment of GI and hepatic diseases, including hepatic encephalopathy, irritable bowel syndrome with diarrhea and ulcerative colitis. Its eye health products are marketed in the following categories: contact lenses, pharmaceutical products, and surgical products.

Market value: $ 11.3 billion ($ 31.93 per share)

Activist: Carl Icahn

Percentage ownership: 7.83%

Average cost: $ 25.57

Activist Comment: Carl Icahn is the grandfather of shareholder activism and a true pioneer of strategy. Although he’s not slowing down at all, he recently reached an agreement with his son, Brett Icahn, to eventually rejoin the company. Brett hired three portfolio managers to help him find the company’s next activity goal. This is Icahn’s first 13D filing since Brett rejoined the company. Brett has said he plans to use his father’s preferred approach to getting companies to make changes to boost their stock prices, though he hasn’t ruled out friendly bets either. This is no departure from the strategy that Carl has used for many years. He can be friendly (i.e. Apple, Netflix) or he can be confrontational (i.e. Forest Labs, Biogen), often it depends on the response of management. Brett is a formidable activist investor himself, not because he’s Carl’s son, but because he has a long track record of highly successful activist investments. Much has been written about the Sargon portfolio that he helped lead at Icahn. It totaled around $ 7 billion at one point and included hugely profitable investments in companies like Netflix Inc. and Apple Inc. The Saragon portfolio outperformed the market well with an annualized return of 27%. Before that, however, Brett started with Icahn as an analyst in 2002 and later was a mentor for campaigns like Hain Celestial (280.3% return versus 46.7% on the S&P500), Take Two Interactive (81.5% versus 64.5%) and mentor Graphics (106.4%) responsible% versus 79.4%).

What’s happening:

Icahn intends to hold discussions with the company’s management and board of directors about ways to increase shareholder value, including the ongoing strategic review of the company.

Backstage:

In Icahn’s 13D at Bausch, he states that he intends to hold discussions with the company about ways to increase shareholder value, including ongoing strategic review of the company and possible board representation. We think he’s really concerned about strategic opportunities. First, the language for board representation is the language for Icahn 13D filings, but the language for strategic review is not. Second, the board of directors already has two 13D shareholder directors – Robert Hale of Value Act and John Paulson of Paulson & Co. More likely than Icahn is interested in creating value through strategic deals at Bausch that has built on many acquisitions over the years the company was operating as a valeant.

Since filing Icahn, 13D shareholder Glenview Capital has published a letter to the company welcoming Icahn as an active shareholder and publicizing his own plan for the company – selling shares or parts of its high quality, well-profiled assets at fair prices To Increase Them Equity and De-Lever offer ownership of iconic assets to the many pools of capital seeking a scarce number of fairly valued, high-quality growth alternatives. As Icahn alludes to in his filing, the company has already announced that it will separate its eye health business from the rest of Bausch Health Companies Inc. into an independent public company in late 2021, and Glenview is backing the sale of 40% of that business to the public. Management said it was investigating various capitalization structures and the shape of the separation transaction in order to properly activate both companies after the separation. As Glenview suggests, there are also opportunities to add value by selling other businesses.

This is an area where Icahn could certainly add value. The eye care business accounted for $ 3.7 billion of the company’s revenue of $ 8.6 billion in 2019. Icahn will certainly want to make sure shareholders get the full value of the split, which could mean a sale of the business instead of a split. Who knows, maybe optimal value would be achieved by selling the eye care business and / or other Bausch businesses to a SPAC? With the number of SPACs being rolled out these days, it’s only a matter of time before they have to deal with subsidiaries of public corporations.

Ken Squire is the founder and president of 13D Monitor, an institutional shareholder activism research service, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist assets.

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