Valeant shares rose more than 13 per cent in New York trading after the serial pharma dealmaker unveiled its biggest acquisition - the $14.5bn takeover of Salix.
Canada-based Valeant said it would finance the $158-a-share cash offer - which values Salix at around $10bn plus $4.5bn in debt - with $22.2bn of bonds and bank loans that will send its total debt sharply higher.
The transaction marks a return to big-ticket deal making for Mike Pearson, Valeant chief executive, after he lost an acrimonious battle to buy Allergan, the maker of Botox, last year. It brings the total amount Valeant has spent on acquisitions in the past five years to more than $30bn.
Valeant forecast the acquisition would boost earnings by more than 20 per cent next year. "The deal is very accretive on earnings per share . . . it's hard to argue with that," said Umer Raffat at Evercore ISI.
Banks led by Deutsche Bank and HSBC will provide the debt - $15bn for the deal, and a further $7.5bn to tide the group over while it secures a new agreement with existing creditors.
Valeant said it expected the interest rate on its new debt to be between 5.5 per cent and 6 per cent, and that its ratio of net debt to earnings before interest tax depreciation and amortisation would jump from below four times to roughly 5.6 times.
It said it would seek an amendment to its existing credit agreement. "And when we receive this amendment, the $7.5bn backstop will fall away. We fully expect to secure an amendment to our current credit agreement within the next two week."
Valeant, a notorious cost-cutter, said it would cut spending on research and development at North Carolina-based Salix, a specialist in gastrointestinal drugs. It said it would remove $500m of annual costs following the deal - equivalent to almost 90 per cent of the $560m that Salix said it expected to spend on research, marketing and overheads in 2015.
The Quebec-based company will use its non-US domicile and ultra-low tax to extract value from the deal; the combined company is expected to have a tax rate of 5 per cent, compared to approximately 30 per cent for Salix.
Critics of Valeant say it is a debt-fuelled deals juggernaut that has an unsustainable strategy of boosting earnings by buying subpar assets and slashing costs. To counter suggestions that the true state of its underlying business is being masked by constant deal making, Valeant said it would report separate financial results for Salix and another recent acquisition for the rest of this year.
The deal takes Valeant into the area of gastrointestinal medicine for the first time, and will make the company very reliant on sales of Salix's main drug, Xifaxan.
Traditionally, Valeant has sourced its revenues from around 20 top ten products, rather than an individual therapeutic area or blockbuster drug. But following the deal around a quarter of its total sales will come from Salix's gastrointestinal products.
"This single product exposure is very unusual. Valeant is going to have a potentially $2bn product. I think it will get a very different level of shareholder scrutiny," said Mr Raffat, an analyst at ISI Evercore, who was generally supportive of the deal.
The success of Xifaxan, used to treat travellers' diarrhoea and a rare brain condition, hinges on the company winning approval in the US to use the drug to treat a type of irritable bowel syndrome. "We feel quite comfortable that this indication will be approved . . . we are hopeful it gets approved this spring," said Mr Pearson.
Valeant outlined details of the Salix acquisition as it unveiled fourth-quarter results. It reported net income of $534m, or $1.56 per diluted share, compared to $125m a year earlier, or 36 cents per diluted share. Revenue rose to $2.28bn, up from $2.06bn in the fourth quarter of 2013.
Valeant said it expected cash earnings of $2.30 per share in this year's first quarter.
The takeover caps a tumultuous few months for Salix. Allergan tried to buy the company last autumn as part of its defence against Valeant's overtures. But it pulled out of the deal after uncovering accounting irregularities, which eventually prompted the chief financial officer to resign and the chief executive to announce her retirement.
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