The Solution That Will Quickly Move Valient Back To Health


Posted on June 23rd, by ben.maher@litchfieldholdings.co in Investing, Portfolio, Positions, Uncategorized. Comments Off on The Solution That Will Quickly Move Valient Back To Health

This solution is designed to quickly improve the health of Valient’s balance sheet and avoid cumulative dilution for both shareholders and convertible bond holders.  

Additionally, its designed to provide all stakeholders with share count vision and transparency over the foreseeable future.

Step 1: Set aside 100M shares in treasury for convertible note offering through a buyback and a set aside of current shares in treasury (no dilution)

  1. stock buyback – buyback enough stock so that you can set aside 100M shares for the convertible note offering.
  2. add an appropriate number of shares from treasury to the bought back shares to get to 100M shares (no dilution)

Step 2: Issue $7B in convertible notes that take out the current debt due in 2020 and part of 2021.  

$7B in convertible notes may be converted into 100M shares of stock based on the following criteria 

  1. Conversion price at the end of term is set at $70 (this may seem high but see note below regarding stock price momentum)
  2. Immediate conversion of all notes if stock price hits $100 (this may seem high but see note below regarding stock price momentum)

–          a conversion would immediately free up approx 500M in free cash flow currently being used for interest.

–          If the stock at the end of the original term goes below $70 additional shares are issued to the convertible note holders to make up for the shortfall.

Everyone is Happy

  1. shareholders are happy despite the pain incurred over the last two years as they were not diluted, cash flow is increasing, the balance sheet is healthy and their stock is appreciating.
  2. bond holders are happy because they are either getting a coupon over the term or provided with a substantively higher return profile.
  3. management is happy as they have quickly reduced debt by 25%, increased cash flow by $500M, did not dilute shareholders / employee options, leverage ratio has dropped significantly, have provided an opportunity to now focus on growth and have increased the R&D budget.  AND they can stick to DAVID MARIS at Wells Fargo and IRINA RIVKIND KOFFLER at Mizuho

Simple Math:

  1. share count stays at approx 350M
  2. convertible notes issued $7B
  3. fcf unlocked $500M/yr after conversion
  4. total share count when stock hits $70 = 350M
  5. total share count when stock hits $100 (mandatory convertible conversion) = 350m

Note: Stock price appreciation comes when momentum and relative performance improves

  1. The buyback will provide a bid under the stock thus allowing for improved price performance that will trigger relative performance and momentum investors.  This will in turn allow you to quickly get to the $70 conversion price and the $100 mandatory convertible conversion price.
  2. This will signal to the market that Valeant is much stronger than what the market believes it to be.
  3. It will blindside market manipulators that continue to drive the stock price down.
  4. MOST IMPORTANT –  this will drastically shift the momentum and relative performance metrics of the company (without damaging your operating metrics). 70% OF THE TRADING STRATEGIES BEING EMPLOYED ARE QUANT, RELATIVE PERFORMANCE or MOMENTUM STRATEGIES.
  5. these strategies are agnostic quantitative strategies that only look at data through designed algorithms.
  6. this means that if Valeant’s stock goes up it will continue to go up.
  7. The buyback will positively impact the following metrics that these trading strategies employ.  RPS (revenue per share), EPS, ROE, Ptroski F-Score, 6 month indexed relative performance and 12 month indexed relative performance, just to name a few.
  8. What this ultimately does is quickly and significantly increase your market cap as momentum begets more momentum.

 





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