NEW YORK (TheStreet) -- Shares of Salix Pharmaceuticals (SLXP are up 0.6% to $156.70 in afternoon trading today as Cantor Fitzgerald raised its price target to $158 from $151, while downgrading the company to "hold" from "buy" after Valeant Pharmaceuticals International (VRX agreed to buy Salix for $158 a share in a cash deal valued at $14.5 billion.
"We are not expecting a competing bidder at this time and note that there is a $356 million termination fee to discourage Salix from finding alternative buyers. As a result, we are downgrading and increasing our price target to correspond to our prior takeout valuation, which was based on 8x discounted 2020 sales and Valeant's all-cash offer," Cantor Fitzgerald said.
The all-cash offer will be financed through bank debt and bonds, and management estimated taking on approximately $15 billion of debt at 5.5% to 6% interest, analysts said.
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Valeant anticipates greater than 20% EPS accretion in 2016, and modest accretion in 2015 due to continued work-down of Salix inventory levels, according to Cantor Fitzgerald.
Valeant indicated it had conducted due diligence on Salix's inventory issues and estimates reduction in inventory levels will have a net impact of more than $500 million on 2015 revenue. Management also indicated that it conducted due diligence on Salix's "traveler's diarrhea" drug Xifaxan for the IBS-D indication and expects the drug to either be approved in May or to encounter at most a one-year delay under a worst-case scenario, analysts said.
Separately, TheStreet Ratings team rates SALIX PHARMACEUTICALS LTD as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:
"We rate SALIX PHARMACEUTICALS LTD (SLXP) a HOLD. The primary factors that have impacted our rating are mixed, some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, solid stock price performance and good cash flow from operations. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, generally higher debt management risk and disappointing return on equity."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The revenue growth greatly exceeded the industry average of 13.7%. Since the same quarter one year prior, revenues rose by 48.9%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- Compared to its closing price of one year ago, SLXP's share price has jumped by 45.86%, exceeding the performance of the broader market during that same time frame. Although SLXP had significant growth over the past year, our hold rating indicates that we do not recommend additional investment in this stock at the current time.
- SALIX PHARMACEUTICALS LTD has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, SALIX PHARMACEUTICALS LTD increased its bottom line by earning $2.14 versus $1.01 in the prior year. This year, the market expects an improvement in earnings ($3.94 versus $2.14).
- The debt-to-equity ratio is very high at 5.57 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company. To add to this, SLXP has a quick ratio of 0.59, this demonstrates the lack of ability of the company to cover short-term liquidity needs.
- Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Pharmaceuticals industry and the overall market, SALIX PHARMACEUTICALS LTD's return on equity significantly trails that of both the industry average and the S&P 500.
- You can view the full analysis from the report here: SLXP Ratings Report