Biovail sale oddly leaves its owners in control

By Robert Cyran

It’s a neat trick to sell a company at a premium and keep a controlling interest. But Biovail is pulling it off. Specialty U.S. drug group Valeant is effectively paying 15 percent over the market price for Canadian rival Biovail – yet the latter’s shareholders are ending up with 50.5 percent of the merged group. There is a rationale, but the danger is it’s too complex.

There is strategic logic. Valeant, whose chief executive Michael Pearson will head the combined company, thinks $175 million of annual cost cuts are there for the taking. If so, these savings could be worth more than $1 billion today – against the combined market capitalization of the two firms of $5.8 billion.

Yet tax problems could have killed the deal. Biovail’s operating subsidiary is based in Barbados. To preserve its low tax rate, that company needed to be the entity doing the acquiring. Meanwhile, also for tax reasons Valeant needed to end up owning less than half the combined entity. As the bigger company by market capitalization before the deal, that meant making a cash payout for its own shareholders part of the deal.

The result is a curiosity. In return for giving up their collective control, Valeant shareholders end up with cash and shares in Biovail worth $42.77 for each Valeant share – about $3 less than their value before the deal – plus a promise of another $1 in the form of a dividend before the end of the year. For Biovail shareholders, the merger values their shares at a premium.

Valeant shareholders may figure that their share of the mooted synergies should be worth slightly more than the premium they are ceding to Biovail’s owners. Furthermore, Valeant gets to appoint the tie-breaking director on the combined board – subject to Biovail approval.

Even so, Biovail’s checkered past justifies a certain skepticism. A few years back the firm accused hedge fund SAC Capital and others of conspiring against it – but ended up facing Securities and Exchange Commission charges, which it settled. That may all be in Biovail’s past now. And on one interpretation, Valeant’s clever structuring has allowed the business benefits to trump pesky tax problems. But it would be a shame if it turns out strategic discretion was neglected in that valiant effort.

Published on June 21, 2010

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