This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Bausch & Lomb 'Success' Less Than Meets the Eye

NEW YORK ( TheStreet) -- Warburg Pincus is opening eyes for all the wrong reasons after agreeing to sell Bausch & Lomb to Valeant Pharmaceuticals (VRX ) for $8.7 billion, in a deal that may net the private equity firm a threefold return on its 2007 buyout investment.

Bausch & Lomb's takeover came near the peak of a leveraged buyout boom in May 2007. However, the deal is now being heralded as a classic investment success given Warburg Pincus's threefold gain, or annual internal rates of return of about 20%, in line with private equity industry standards.

If Bausch & Lomb is typical of how private equity firms generate their oft-celebrated investment returns the deal should be viewed as an indictment of the industry.

Buyout firms are often heralded for two-and-three-bagger investments in superficial analysis, but a closer look at the numbers indicates returns are often generated by a unique arbitrage available only to buyout funds who can raise $1 billion loan with a phone call.

Consider that while Warburg Pincus may be tripling its investment on Bausch & Lomb, the company's value has only increased about $830 million, according to terms of its $3.67 billion May 16, 2007 takeover and Monday's sale to Valeant, which will pay Warburg Pincus $4.5 billion for control of the eye care specialist.

Using just the equity value of Bausch & Lomb, Warburg Pincus's over six year investment in the company has yielded about a 22% absolute gain and annual returns of under 4%. While the growth in Bausch & Lomb's equity value slightly exceeds sub 20% gains posted by the S&P 500 over the span of Warburg Pincus's investment, it isn't worthy of a firm that closed a new $11.2 billion buyout fund earlier in May.

So if Bausch & Lomb was taken private by Warburg Pincus for $3.67 billion and is being sold to Valeant Pharmaceuticals for $4.5 billion, how is the PE firm getting it's much hyped three-bagger?

The simple answer is debt, which, gives Monday's deal it's reported $8.7 billion price tag.

A skeptical view of Monday's deal shows the vast majority of Warburg Pincus's investment gains are a result of Valeant Pharmaceuticals giving the private equity firm cash for its takeover financing.

In taking Bausch & Lomb private, Warburg Pincus appears to have to put up just over $1 billion in cash for control of the company, while financing a remaining $2.59 billion, according to Bloomberg data. In 2012, Bausch & Lomb also took $800 million in additional debt to pay a special dividend to Warburg Pincus and co-investor Welsh Carson.

Happily for Warburg Pincus, it is getting paid in cash for debt the PE firm will effectively throw onto Bausch & Lomb's next owner, Valeant Pharmaceuticals.

According to the terms of Monday's deal, Valeant will repay $4.2 billion in Bausch & Lomb's debt through a mixture of an up-to-$2 billion equity raise and nearly $7 billion in new financing, arranged by Goldman Sachs.

Warburg Pincus may deserve some credit for growing earnings before interest, taxes, depreciation and amortization (EBITDA) and operating cash flow at Bausch & Lomb, but numbers clearly show majority of its investment gains come from taking cash for debt financing.

For instance, Bausch & Lomb was a profitable company when it was acquired by Warburg Pincus. However, the company's interest costs now consume over 100% of its operating income, according to 2010, 2011 and 2012 financial statements in a S-1 filing with the Securities and Exchange Commission.

Employment at Bausch & Lomb has fallen by over 15% during the company's time in private hands. The bulk of an impressive-sounding 33% EBITDA growth between 2011 and 2012, meanwhile, is mostly attributable to escalating interest expense and a tax rate that fell by over 60%.

Judging by financial statements, Bausch & Lomb does generate more revenue, and free cash flow than it did prior to its 2007 buyout. That's why the company's equity value has grown slightly and Bausch & Lomb managed to attract some interest both as an IPO and M&A candidate.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
APO $16.55 -1.30%
HCA $80.72 1.20%
GS $159.81 -0.16%
I $3.65 -3.70%
KKR $13.41 0.15%


Chart of I:DJI
DOW 17,691.78 +40.52 0.23%
S&P 500 2,056.24 +5.12 0.25%
NASDAQ 4,736.6340 +10.9950 0.23%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs