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Bausch Eye-Opener

The eyecare company commands a premium despite its many flaws.

For a company damaged by such ugly problems as product recalls and financial restatements,

Bausch & Lomb

(BOL)

sure did fetch a pretty price

To be sure, the eye care giant remains on the lookout for a better deal following Wednesday's $4.5 billion leveraged buyout offer from Warburg Pincus. But the company may have already secured the most attractive proposal that it's going to get.

After all, B&L stockholders stand to pocket $65 a share - the highest price they have seen in more than a year - in exchange for their injured company.

"Given BOL's solid brand equity (despite last year's MoistureLoc recall) and a clause in the deal giving BOL the right to solicit superior proposals over the next 50 days, we're not surprised the stock is trading above $65 this morning," Baird analyst Jeff Johnson wrote on Wednesday. But "while other private equity firms could take a look, public companies are likely to shy away from BOL given the 344 product liability lawsuits in which the company is currently involved."

Meanwhile, Johnson added, "our sum-of-the-parts analysis ... suggests takeout value in the low to mid $60 range, with the $65 Warburg price near the upper end of what we believe represents fair value."

B&L's stock surged past that level, rocketing 9.3% to $67.23 on Wednesday nonetheless.

Less than a week ago, following a big first-quarter miss, Johnson estimated that B&L was in fact worth considerably less. He established a new $54 price target on the company's stock, saying that the shares - which were hovering around $61 at the time - included up to $8 in takeout value that could be at risk.

"Feedback from our industry sources remains mixed to negative on the potential for such a deal," explained Johnson, whose firm is seeking investment banking business from B&L. "With up- and downside risk fairly balanced, we remain on the sidelines."

TheStreet Recommends

Other experts felt similarly cautious. Indeed, few mainstream analysts recommended buying B&L - a former $80 highflier - ahead of this week's LBO.

BMO Capital Markets analyst Joanne Wuensch maintained a market-perform rating on B&L instead, saying that the company "remains challenged" and faces "lingering issues" even if takeover speculation had provided a floor beneath the stock. But Credit Suisse analyst Marc Goodman, worried about the company's slow start this year, feared that the stock could crash to $46 regardless.

"Management did not change its top-line or pretax income guidance for 2007," acknowledged Goodman, whose firm has investment banking ties to the company. But first-quarter sales "struggled to grow more than 4% in any business segment, so it is tough to get there ... We look forward to more visibility with the businesses when management is finally able to talk with the investment community again."

Management followed through with big news of the LBO, which will allow B&L to pursue its recovery without pesky questions from shareholders, instead. As a private company, CEO Ronald Zerrella said on Wednesday, B&L "will have greater flexibility to focus on our long-term strategic direction to be a global leader" in the eye care industry.

Still, B&L bondholders - faced with surging debt levels - will be watching the company quite closely. Indeed, Standard & Poor's has already cut B&L's credit rating to junk status because of the looming LBO.

"Even if the transaction is not consummated ... management's willingness to aggressively leverage to this extent is not commensurate with an investment-grade rating," S&P analyst Cheryl Richer wrote on Wednesday. "Standard & Poor's will monitor the progress of this transaction to determine the extent to which the rating will decline" any further.

Richer had expressed some uneasiness even before this week's development. Earlier this month, she warned that B&L already lacked the financial strength to justify its investment-grade rating.

Before its April 2006 recall of MoistureLoc contact lens fluid, Richer reminded, B&L still enjoyed "solid liquidity and a sizable cash balance." But since then, she noted, B&L has encountered financial difficulties that linger even today.

"In addition to lost revenue from its MoistureLoc lens care solution - a high-margin product - the company experienced collateral damage" in other product lines, Richer wrote. Thus, "although it is expected to improve in 2007, B&L's financial profile is currently somewhat weak."

At the same time, however, S&P recognized that B&L had finally managed to put another major challenge behind it.

"What began as a reporting delay due to an investigation into questionable accounting practices at Brazilian and Korean subsidiaries ... snowballed into a protracted hiatus (six quarters) in financial disclosure," Richer recalled. But "a large cloud has lifted as of April 25, 2007, (when B&L filed its long-awaited financial reports) as reflected by B&L's stock price, which rose by about 29% from the end of March to late April.

"There is no immediate impact on the rating, although this development is positive from a liquidity/access to capital perspective because B&L's investors now have access to information."