The Merger Between Biovail and Valeant
Investors reacted positively to the news of Biovail Corp. (BVF), Canada’s largest publicly traded drugmaker, and Valeant Pharmaceuticals Int’l (VRX) coming together to form one company. The two decided to merge in a cash-and-stock deal, and the new company, called Valeant Pharmaceuticals International, Inc., will be based in Mississauga, Ontario, and headed by Valeant’s Chief Executive, J. Michael Pearson. The combined company will have significant presence in North America, with operations in eight other countries.
Under the terms of the agreement, holders of VRX shares will get a one-time cash dividend of $16.77 a share before the deal closes, and 1.7809 shares of BVF common for each VRX share owned. Upon completion of the merger, which is expected by the end of the year, Biovail’s shareholders will own 50.5% of the new company and Valeant’s shareholders, 49.5%. Valeant, which was founded in 1959 by a former Prime Minister of the then Yugoslavia, is a multinational pharmaceutical company that develops and manufactures a wide range of specialty products used in the areas of neurology and dermatology.
Biovail engages in the formulation, clinical testing, registration, manufacture, and commercialization of pharmaceutical products for treatment of the central nervous system.
Both companies have outstanding convertible debt issues. Biovail’s $350 million principal amount 5.375% senior convertible notes due 2014 were issued in June 2009 at par value, and convertible into 67.088 common shares, which equates to a conversion price of $14.91 a share. At the time of this writing, the stock price was $18.45 a share. That makes conversion of this bond worth $1,237.78. The bond matures August 1, 2014, but may be called for redemption on or after August 2, 2012, if the underlying common price is at least $19.38 for 20 of any 30 consecutive business days. Since the notes are already in the money, bondholders could convert now if they so choose, but the benefit is debatable since Biovail is the purchaser in this transaction.
Valeant Pharmaceuticals Int’l has two convertible debt issues outstanding. The $48.866 million principal amount of 3% convertible notes mature on August 16, 2010. Its conversion value, based on a stock price of $50.74 a share, is over $1,600.00 per note. So, conversion at any time before maturity would still be worthwhile for holders. There are also $224.96 principal amount of 4% convertible notes outstanding that are due to mature on November 15, 2013. These notes are callable on or after May 20, 2011. However, the heightened common stock price has made the conversion value of these notes very attractive. By holding, investors can continue to collect interest payments and have the downside protection of the bond, while awaiting the finalization of the merger. Moreover, because of the convertible nature of the security, the consideration one would receive won’t change if the convertible bond position is maintained, but if converted, the benefits of the bond would be lost.