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Lens solution

10 April 2013 By Robert Cyran

The mooted value for Bausch & Lomb needs to be re-examined through fresh lenses. Private equity firm Warburg Pincus bought the eye care company for $3.7 billion at the peak of the buyout boom and has been reportedly seeking a valuation of up to $10 billion. Even after cleaning up Bausch & Lomb’s problems with recalls and accounting, it isn’t worth a big premium to other similar companies. A figure like $8 billion makes more sense.

The 2007 leveraged buyout always held more promise than most other debt-inflated deals of the era. Bausch & Lomb was too ugly for public markets. Several hundred consumers using its contact solution developed infections and sued the company. The Brazilian and Spanish units admitted fiddling the books. Investors feared sales would dry up and the valuation tumbled. Warburg Pincus opportunistically scooped up the company at less than two times sales.

Five years on, Bausch & Lomb has recovered. About two-thirds of the lawsuits have been settled and the accounting difficulties are behind it. Moreover, investors appear to be welcoming buyouts of the era and are broadly eager for new shares.

Nevertheless, rivals appear to have shied away from Bausch & Lomb’s $10 billion price tag and fund managers would be wise to do the same. The vision and surgery businesses, which make up nearly 60 percent of sales, are mature. Its drugs unit has better prospects, but the company isn’t a pharmaceutical powerhouse.

At the reported price, Bausch & Lomb would be valued at 42 times earnings before interest and taxes. By contrast, Merck trades at 10 times and Johnson & Johnson at 16 times. Valuing revenue may be more appropriate for a company like Bausch & Lomb, which is still improving profitability. Applying a 15 percent discount to the blended enterprise value-to-sales multiples of Merck and J&J would make Bausch & Lomb worth a more reasonable $8 billion.

For Warburg Pincus, it just received $750 million of dividends from Bausch & Lomb. At $8 billion, its equity would be worth $4.3 billion. Combined, that would be a return on paper of almost three times its initial $1.7 billion investment. Holding out for too much would be myopic.


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