WEBVTT - Koons: Valeant is running into trouble

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<v Speaker 1>This is a Bloomberg Business Flash and I'm Karin Moscow.

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<v Speaker 1>to thirty six seventy of barrel. Comex goal down one

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<v Speaker 1>percent or twelve dollars thirty cents to twelve thirty three

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<v Speaker 1>and ounce the euro a dollar eleven eleven the end

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<v Speaker 1>one twelve point eight zero. That's a Bloomberg business flash.

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<v Speaker 1>Tom and Mike Karen, thanks so much. It is a

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<v Speaker 1>house of cards. We've avoided the hype and the hysteria

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<v Speaker 1>about Valiant, but unfortunately this morning it's nothing but an implosion.

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<v Speaker 1>The stock is down nineteen point five percent. The call

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<v Speaker 1>has just occurred. Joining us now Cynthia Coons, who has

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<v Speaker 1>followed his soap opera for Bloomberg and knows she has

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<v Speaker 1>her training from Penn State, where she was really a

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<v Speaker 1>major grizzled rec reporter for the Daily Collegian, and she

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<v Speaker 1>joins us right now. Cynthia, what did you learn in

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<v Speaker 1>the call about the immediate desperation of Valiant? Well, I

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<v Speaker 1>think what was most interesting about the call was how

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<v Speaker 1>much they had to focus on debt and what they

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<v Speaker 1>took exactly, and this was something totally different. They've always

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<v Speaker 1>said weren't compliance with our covenants and they've moved on.

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<v Speaker 1>It hasn't been a call where in this instance they

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<v Speaker 1>talked about debt. Probably thirty percent of the time, and

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<v Speaker 1>they came back to it, and one of the main

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<v Speaker 1>issues is they talked about they're going to pay down

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<v Speaker 1>more than one point seven billion of debt. In December

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<v Speaker 1>they had said they were going to pay down more

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<v Speaker 1>than two point two five billions, so they've reduced them. Okay, okay,

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<v Speaker 1>But the basic idea is, there's a trip point on

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<v Speaker 1>equity price where debt becomes immediate. Are they anywhere near

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<v Speaker 1>at fifty six dollars to share the cell sides trip

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<v Speaker 1>point where equity the equity debt blend doesn't mix. I'm

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<v Speaker 1>not sure about that metric precisely, but I do know

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<v Speaker 1>that they are running into trouble in terms of when

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<v Speaker 1>they file their ten K and what that means in

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<v Speaker 1>terms of whether or not bond holder. Now what we

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<v Speaker 1>know from having actually canvas the market on this issue,

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<v Speaker 1>we've been looking into this for quite some times. It's

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<v Speaker 1>unlikely to be a major problem for them. Usually bond

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<v Speaker 1>holders will give you a waiver and you can just

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<v Speaker 1>keep going, you pay, sort of working out. They're a

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<v Speaker 1>huge debt holders. It's in the debt market's interest to

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<v Speaker 1>not let them de fall on that issue. The near

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<v Speaker 1>reporting of Mr Ackman and the cell side and the

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<v Speaker 1>believers and the disbelievers. Is this a story about revenue dynamics,

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<v Speaker 1>no pricing in real mystery about unit growth at the

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<v Speaker 1>top line of the income statement? Or is this a

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<v Speaker 1>balance sheet soap opera about investment deals gone bad and

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<v Speaker 1>some plays. It's both. I think right now everyone's trying

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<v Speaker 1>to get their head around where the earning shortfalls are

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<v Speaker 1>and why the numbers have changed. So draft is that

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<v Speaker 1>on the income statement or on the balance sheet? That's

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<v Speaker 1>the income statement, But obviously everyone always knew that the

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<v Speaker 1>balance sheet was heavily levered, so it's just to flow through.

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<v Speaker 1>The balance sheet has always been secondary because the expectation

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<v Speaker 1>has been that they've had these revenue levers that now

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<v Speaker 1>it's unclear why they aren't able to pull them and

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<v Speaker 1>why so much has changed from January to now, And

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<v Speaker 1>so I think there's a lot of there's a lot

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<v Speaker 1>of concern that they had numbers in December reiterated in January.

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<v Speaker 1>Mike was gone. It was only two months and he's

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<v Speaker 1>come back and changed these numbers dramatically. Now a lot

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<v Speaker 1>has happened since he's been gone. But I think the

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<v Speaker 1>math ingnitude of what they're doing here with the numbers

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<v Speaker 1>has just really shocked investors. An analyst, and it's just

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<v Speaker 1>much worse than anyone like three years out, fourteen billions,

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<v Speaker 1>one billion on debt. It Uh. It seems to be

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<v Speaker 1>shocking to a lot of these analysts because Mike person

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<v Speaker 1>had some private calls with them, some of them, uh,

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<v Speaker 1>just a week or so and now they have gotten

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<v Speaker 1>a completely different story. What's up with that? Yeah, you

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<v Speaker 1>can hear the incredulity and their voice voices. It sounds

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<v Speaker 1>like when analysts get on there almost saying, hey, wait

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<v Speaker 1>a minute. Some of them their questions and the way

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<v Speaker 1>they're phrasing them, what are you gonna do about your

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<v Speaker 1>credibility now? And what happened with thy faccon and we

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<v Speaker 1>thought those sales were going through Walgreens and with thy

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<v Speaker 1>faccin is one of their is actually their biggest ring

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<v Speaker 1>at the moment. It's um it's a g I drug

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<v Speaker 1>that they acquired through salex last year. And and so

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<v Speaker 1>there's a lot of questions in terms of hey, waitit, hey, wait,

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<v Speaker 1>what you've been telling us up to now it just

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<v Speaker 1>doesn't feel like it's standing up. So you can just

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<v Speaker 1>feel the tone and I think we'll see it, and

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<v Speaker 1>we'll probably will see that in reflection reflected in their

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<v Speaker 1>notes and perhaps their price targets. I mean, some analysts

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<v Speaker 1>still have two hundred dollar price targets on this stock.

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<v Speaker 1>Good luck with that, Cynthia. When you look at the

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<v Speaker 1>ownership of this Mr Ackman, is the number two ownership

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<v Speaker 1>run kind of uh, you know the usual victims. Is

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<v Speaker 1>this a four all one K institutional holding or is

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<v Speaker 1>it all a set of holders who are in the

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<v Speaker 1>game and understand it's a game of speculation. No. I

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<v Speaker 1>think this is a widely held both stock and bond.

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<v Speaker 1>I think where this this company becomes a major factor

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<v Speaker 1>in in perhaps every anyone's throwing k is that if

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<v Speaker 1>you're someone's in a bond fund, those bonds that's gonna

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<v Speaker 1>there's gonna be a proportion of that that's in valiant

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<v Speaker 1>because it's such a big debt issuer. So I think

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<v Speaker 1>this stock, and also just the sheer size of it,

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<v Speaker 1>I think there are a lot of everyday investors who

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<v Speaker 1>would get really significantly hurt if this company doesn't pull

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<v Speaker 1>it off. And you know, they sort of hinted at

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<v Speaker 1>certain end games and someone asked the question, would you

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<v Speaker 1>consider breaking it up, and Mike Pearson said, look, if

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<v Speaker 1>things don't work out, we will have to consider other options.

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<v Speaker 1>But you know, we're not thinking about that yet. So

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<v Speaker 1>I mean they're they're they're not thinking about it, but

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<v Speaker 1>they're not avoiding it or dismissing it out of hand

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<v Speaker 1>as though they're not looking at the future as a

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<v Speaker 1>potential break up there. But that does still feel like

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<v Speaker 1>a ways off in terms of what they're talking about today. Well,

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<v Speaker 1>break up or sell part of the company. They issued

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<v Speaker 1>a lot of debt to pay for a lot of acquisitions.

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<v Speaker 1>Could they sell some of those acquisitions to raise money

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<v Speaker 1>to pay the debt? Sure, they're already flagging that. They

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<v Speaker 1>said there and talks to divest the non core assets.

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<v Speaker 1>They wouldn't really give enough clarity for us to know

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<v Speaker 1>what exactly those assets are. Perhaps as the calls still

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<v Speaker 1>going on, so perhaps they'll be more detail on that.

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<v Speaker 1>But that's the that's the real question. What do they sell?

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<v Speaker 1>I mean, Cynthia, good luck with this. I love the

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<v Speaker 1>headline Valiant taking Walgreen's cost of good sold through the

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<v Speaker 1>s G and A line. There's a cardinal rule in

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<v Speaker 1>in see if the investment when you get the headlines

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<v Speaker 1>like that you're in trouble. Who are their auditors? Are

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<v Speaker 1>they telling these guys what to do? P WC. I

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<v Speaker 1>believe is there auditors? But these numbers are not audited

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<v Speaker 1>right now, that's the other big question. Markets. They are

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<v Speaker 1>releasing on audited numbers for the think of giving the

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<v Speaker 1>market update because it has been a while that work

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<v Speaker 1>wants it. But um, but then if you read the

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<v Speaker 1>risk factors and the release and these are on audited numbers,

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<v Speaker 1>they could be subject to change. So we've got to

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<v Speaker 1>get you off the radio, Cynthia, because the stocks down

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<v Speaker 1>two points since you open your mouth. That's a bad thing.

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<v Speaker 1>Cynthia Couse, thank you so much, greatly appreciate it, really

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<v Speaker 1>appreciate her coming off the call. She is with Bloomberg

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<v Speaker 1>News with just terrific service. Us studying uh, this soap

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<v Speaker 1>opera called Valiant. When you get the markets open Bloomberg Surveillance,

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<v Speaker 1>we're kind of get out of the opening bell. Brought

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