Glenview Capital Management, Owner of 6% of Bausch Health Companies Inc., (BHC) Publicly Releases Letter to CEO, Joe Papa, Calls for Spinoff
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Joseph PapaChairman of the Board and Chief Executive OfficerBausch Health Companies Inc.400 Somerset Corporate Blvd.Bridgewater, NJ 08807 (NYSE: BHC)
As you are aware, our firm, Glenview Capital Management, has been a top shareholder of Bausch Health Companies ("BHC", "Bausch", or the "Company") since late-2018 and remains so today. At present, we own more than 21 million shares, or approximately 6% of the Company, primarily in voting securities. On behalf of shareholders, we begin by thanking the women and men of Bausch for their efforts in promoting global health throughout the pandemic and recognize their resilience through challenging circumstances.
Despite the strength and bright prospects of the various franchises that operate under the holding company structure, the Company's shares trade for only 8x 2020 earnings that were depressed by COVID-19 disruption and only 6x consensus 2022 forecasts. In fact, BHC's professional leadership and workforce have driven a turnaround from EBITDA declines to profitable growth, and yet the equity sits lower than when new Management arrived almost five years ago, and the human capital of BHC have little reward to show for their efforts. Persistently low stock prices make it harder to attract and retain key talent which is vital to drive long-term growth and value. For two years, we have written and spoken privately to you and the Board to offer suggestions to drive shareholder value, including more specific and actionable recommendations concurrent with our Schedule 13D filing in July of 2020. Yet while alternatives are discussed both privately and publicly, there has been no action to unlock value and position each franchise under the BHC holding company for maximum growth and success. Simply put, from an outsider's perspective, the action plan has been 100% plan, 0% action.
While the Company appears to be studying comprehensive solutions, the lack of progress has attracted legendary activist and value-investor Carl Icahn, whose engagement we welcome, but it has failed to attract many of the respected long-only institutions that traditionally anchor the top of the shareholder lists of leading healthcare businesses. Many investors have been scared off by the conundrum of the "value death-spiral" – the equity trades at a discount because of high leverage, and people are scared that the Company will eventually be forced to sell cheap equity to reduce debt, thereby putting even more downward pressure on the share price. We think this is a naïve and false narrative, but the Company has failed to put forth a precise and cohesive alternative. As such, we reiterate our specific plan to you herein, and we release this letter publicly to provide a clear path forward for our fellow shareholders to consider.
My former high school physics teacher, Saul Ploplys, taught that the best way to solve a complex problem is to start by solving part of it, correctly. Today's markets highlight the problem plainly: there has never been a larger gap in stock price valuations or enthusiasm between newly-issued, well-capitalized growth equities that are index eligible, ESG-aligned and powered by incented and talented management teams versus the massive discounts that pervade overleveraged complex holding companies. Therefore, we believe the solution is obvious – sell off stakes in or portions of your high-value, optimally-profiled assets at fair prices to raise equity and delever, replacing the value death-spiral narrative with a well-orchestrated campaign to offer ownership in iconic assets to the many pools of capital who are chasing a scarce number of fairly-valued, quality growth alternatives.
While Management has discussed the possibility of a spin-off of your iconic eye-care franchise, Bausch Global Eyecare ("BGE"), initial details appear to be both vague and suboptimal. We believe that all investors should understand our "Clear Vision" for Bausch Health Companies.
Step 1 – Equitize and Spin-Off Bausch Global Eyecare in an Optimal Fashion in 2021
Bausch Global Eyecare enjoys strong demographic trends, a global leadership position, innovative technology, high recurring revenue and strong cash flows enhanced by its iconic Bausch & Lomb brand cultivated over nearly two centuries. The separation of Bausch Global Eyecare must effect a holistic reprofiling of the Company to be consistent with the clear preferences of institutional, individual and index-fund investors to drive valuation and an efficient cost of capital, which in turn would accelerate growth in the years and decades ahead.
a) INVESTMENT GRADE: BGE should begin its public journey as an investment-grade company, with opening leverage no more than 3.5x and a commitment to rapidly delever to a target of 3x within its first two years as an independent company. Doing so will minimize cost of capital, maximize equity sponsorship, and facilitate long-term R&D and investment. We believe this credit profile would achieve an investment grade rating from major agencies.b) S&P INDEX INCLUSION: BGE should remain domiciled in Canada but establish a U.S. headquarters that allows for qualification in major U.S. equity indices including Standard and Poor's. This will move BGE from a division of an "orphaned security" to a widely followed and broadly held investment commensurate with its brand equity, technology and growth prospects.c) STRONG GOVERNANCE: BGE should be overseen by a new Board of Directors that is diverse and comprised of a majority of new Board members, with some BHC members transferring to the new BGE Board for continuity. Glenview would be happy to work constructively and cooperatively with BHC to recruit members of this new Board if invited to do so by the Company.d) STRONG, WELL-INCENTED MANAGEMENT: BHC should form a special committee of the Board to review, and if necessary, enhance BGE's human capital in preparation for its journey as an independent public company. e) TIE COMPENSATION TO ESG GOALS: BGE should establish clearly stated ESG goals and tie a portion of Management compensation to the achievement of these objectives.f) PROCEED WITH PACE: The spin-off should be completed by year-end 2021.
In order to facilitate the spin-off of Bausch Global Eyecare as an investment grade Company, we recommend Bausch Health Companies retain a globally recognized investment banking firm to seek capital for an up to a 40% equity stake in BGE prior to its spin-off. To be clear, we are recommending raising capital by selling a stake in the eyecare subsidiary, BGE, at fair value, and we specifically recommend against selling any equity in the current holding company, BHC, whose fair value is meaningfully higher than its current share price, in our opinion. This fresh capital would allow for the creation of an investment grade BGE at inception while beginning to improve the credit ratios of the remainder of Bausch Health Companies. We believe this capital could come from a SPAC merger partner, private equity firm, leading North American or global investment institutions or the IPO market.
a) With its Canadian tax domicile, BHC can tax-efficiently spin-off the majority of BGE to shareholders – there is no "80% threshold" as there is in the US.b) The spin-off is clearly allowed under the Company's existing restricted payments basket of $12.6 billion dollars.c) Such a transaction structure would clearly benefit both stockholders and bondholders with reduced aggregate debt and extinguished medium-term debt maturities. This would start the remaining company on its own path for self-improvement with reduced leverage and increased clarity and operating flexibility.d) Capital markets are clearly liquid with deep and broad investment demand for iconic global growth franchises such as BGE – we believe such a mandate would generate significant interest at healthy valuations. Simply put, we believe investors will line up at the door for an opportunity to invest in an evergreen growth eyecare franchise that is well capitalized, soundly governed, ESG-aligned, index-eligible and responsibly managed.e) We believe individual retail investors will be attracted to invest in this well known, 168-year-old franchise if it is presented to them in a clean and healthy manner, consistent with peers.f) We recommend renaming the remaining company to befit its operations. For the purpose of this letter, we will refer to the remaining company as "NewCo".
While we recognize that Bausch announced its intention to spin-off BGE in August of 2020, concurrent with its second quarter earnings, communications regarding the timeline, capital structure and conditions necessary to move forward with the spin have been cryptic at best. In essence, Management appears to be tying its ability to move forward with the BGE separation with its need to also find a permanent and lasting solution to the capital structure of NewCo. Instead of making clear and valuable progress, Bausch appears to be suffering from analysis paralysis and failing to solve at least a meaningful portion of a complex problem, correctly. While we recognize that Management and the Board have access to non-public information, we believe the ability to execute the BGE spin as we set forth needs no more insight than all shareholders currently have in the public domain.
More recently, Management has asserted that we cannot launch a well-capitalized BGE until the leverage of NewCo could immediately reduce from 6x to 5.5x. This target is arbitrary, and in our mind, illogical as investors will react more strongly to a clear investment grade destination than the achievement of a quantitative milestone at a particular point in time. Presently, the Company has high leverage, and we undoubtedly want the overall entities to monetize subsidiary assets efficiently to position separate public companies with a path towards investment grade balance sheets. However, faced with the choice between locking all our assets within a leveraged holding company or liberating half, we believe a sequential program to optimize Bausch is clearly superior to no program at all. The cost of waiting includes employee morale, constraints to innovation and potentially complex competing agendas, all of which we have pointed out to Management consistently for the past two years.
Step 2 – Equitize and Optimize NewCo through Strong Cash Generation and Asset Monetization
We credit Management and the Board for overseeing a portfolio evolution over the past four years that has reduced the growth-challenged Diversified Products segment from ~50% to ~20% of EBITDA of the Company, leading to a meaningfully more valuable and growing overall earnings stream. While the underlying components of Bausch's holding company have meaningfully improved, we now need to present our franchises to the investment community in a more appealing manner. Currently, NewCo would consist of the following strong but loosely related franchises:
Salix Pharmaceuticals: A leading platform for gastrointestinal therapeutics, including blockbuster irritable bowel syndrome drug, XIFAXAN®, and growing chronic idiopathic constipation drug, TRULANCE®, which drive attractive 5-7% medium term growth with a pipeline to bridge beyond losses of exclusivity.
Ortho Dermatologics: Combination of traditional dermatological pharmaceutical portfolio and high growth medical aesthetics platform, Solta Medical, which drive 8-10% growth.
International Rx: – Portfolio of branded drugs, branded generics, and OTC products with strong brand recognition and long-term growth visibility, together driving 5-7% growth.
Diversified Products: Legacy portfolio of products that generate high margins and drive strong cash flow.
To further position NewCo for long-term growth and shareholder value creation, we recommend that BHC continue to engage in portfolio simplification, subsidiary equitization and alignment with passive equity flows to complement existing investors.
a) Reputable news agencies have reported specific strategic interests in the international pharmaceutical assets of NewCo. We believe these are highly valuable franchises whose value may be further improved in combination with local partners.b) High growth assets, such as Solta within the dermatology portfolio, would likely generate significant excitement from individual and institutional growth investors as a separate entity.c) Many similar companies to NewCo have raised capital through royalty financings or other partial asset monetizations that can provide additional capital flexibility and reduce leverage at NewCo.d) BHC's diversified products assets may provide attractive returns to private equity investors in the current interest rate environment, reducing the quantum of debt while augmenting the growth profile of NewCo. e) We recommend that NewCo undertake a similar Board enhancement exercise to replace directors who migrate to the BGE entity while considering Management succession in a thoughtful and organized manner. f) NewCo should establish clearly stated ESG goals and tie a portion of Management compensation to the achievement of these objectives.
Exhibit 1: Glenview's Clear Vision vs. Management Commentary
BGE Credit Rating
3.5x going to 3.0x within 2 years
By Year-End 2021
Possibly 2H 2022
Transparent Board Transition
Opaque, Undescribed Process
Clear ESG Goals
Structure for S&P Inclusion
Specifically, at Subsidiary Level
Majority Through Selling Stake in BGE
"All alternatives are on the table"
Continued Simplification, Growth, and Deleveraging
"Roughly 5.5x leverage"
No Specific Commitments
Drive Equity Performance to Attract and Retain Talent
Opaque, Undescribed Process
Thorough Internal/External Search for Leadership
Opaque, Undescribed Process
We are optimistic that the persistence and innovation of the healthcare community has positioned the world to begin a strong post-COVID-19 recovery as we move through 2021. We are equally optimistic that the operational momentum shown by BHC in the September and December quarters is likely to accelerate meaningfully as we move through coming quarters. However, the market has clearly spoken that a full and efficient valuation needs both a strong underlying business and a presentation of these franchises in a manner that aligns with passive equity inclusion, ESG standards and institutional and retail ownership consistent with the enormous quality of the individual business franchises within BHC. We are interested in constructive partnership with Management, the Board and fellow shareholders to drive significant long-term value creation at Bausch.
Larry RobbinsChief Executive OfficerGlenview Capital Management
Anil FernandoPartnerGlenview Capital Management
Dennis ChaoSenior AnalystGlenview Capital Management
About Glenview Capital Management
Glenview Capital Management, founded in 2000 by Larry Robbins, is a privately held investment management firm. Headquartered in New York, Glenview manages $4 billion across its investment products. For more than twenty years, Glenview's investment goal has been to deliver significant long term outperformance through fundamental research and engaged ownership.
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