I already explained here and here why Valeant Pharmaceuticals (NYSE:VRX) is making a horrible mistake in paying anything close to $10 billion for Salix Pharmaceuticals (NASDAQ:SLXP). Up until this point, it seemed Valeant would have to learn the hard way, not only gaining a company as troubled as Salix, but also the financial risk that comes with it. Thankfully, Endo (NASDAQ:ENDP) has offered Valeant shareholders a way out.
Endo's $175 per share offer for Salix is over $1 billion more than Valeant was planning to spend. Of course, Valeant may counter the offer, or since VRX is already in the process of raising funds, it might very well try to acquire the company with its original offer.
If Valeant were to make no changes, pursue the acquisition as is, and ultimately lose, then it would receive a breakup fee of $356 million. Also, Valeant is making no changes to the financing plan of Salix Pharmaceuticals. The company is raising debt in one of the largest junk bond offerings on record, $9.6 billion.
Valeant already has a horrible debt rating of Ba3 due to the debt it carries around on its balance sheet. With the company apparently abandoning a "halt acquisitions, pay down debt" approach - Valeant just acquired rights to Dendreon's (OTCPK:DNDNQ) Provenge and is trying to buy Salix - chances are it'll have a tough time getting nearly $10 billion from future financing at a decent rate.
Therefore, even if Valeant is unsuccessful in acquiring Salix, it would have an additional $10 billion in capital (bond offering, breakup fee) to pursue something else, or to turnaround and refinance its debt with better terms. That's why I think Valeant is smart to pursue the funding despite Endo's offer, as it may become harder in the future to secure such capital because of VRX's financial distress.
I find it very interesting that Valeant will continue its road show and seek funding despite the Endo acquisition offer. It tells me that the company may have a backup plan in place, or plans to do something more constructive with its cash. Investors should welcome this approach. Because if Valeant acquires Salix, it'll be adding to its already high $16.3 billion debt position, almost guaranteeing an even worse credit rating while gaining assets that are suspect at best. However, if the company can find a better way to put that $10 billion to work, and Endo acquires Salix, Valeant should come out on top.