The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Robert Cyran

NEW YORK, Dec 13 (Reuters Breakingviews) - Myopia would be dangerous in any Bausch + Lomb BLCO.TO deal. The contact lens and eye-care company’s parent, Bausch Health BHC.TO, is keen to offload it and private equity firms are interested. Any buyout price beyond $7 billion, however, starts to get blurry.

Bausch + Lomb’s tangled tale helps explain the challenge. Valeant Pharmaceuticals bought it for nearly $9 billion during a shopping spree that ultimately contributed to its undoing. Valeant rebranded as Bausch Health in 2018, but with massive debt that still totals $20 billion today. After Bausch + Lomb went public a couple of years ago, dealmaker Brent Saunders – who first sold it to Valeant in 2013 – became chief executive.

There are multiple complications for any prospective suitor, such as Blackstone BX.N, which probably would drop out of a possible joint bid with TPG TPG.O, the Financial Times reported. After a decade under thrifty ownership and the presence of hard-charging hedge fund managers John Paulson and Brett Icahn on the board, there are probably fewer costs to cut at Bausch + Lomb than in a typical buyout.

Achieving a higher valuation multiple will be similarly dicey. Bausch + Lomb trades at 11 times estimated EBITDA over the next 12 months, according to LSEG data, while peer Alcon ALCC.S fetches 16 times. The discount makes some sense because Alcon devotes more money as a percentage of sales to R&D, improving the perceived prospects from future developments. Although private equity generated about half its returns between 2013 and 2023 from multiple expansion, according to consultancy Bain, that component is threatened by sustained higher interest rates.

If a buyer paid $20 a share for Bausch + Lomb, or almost a 30% premium to the undisturbed price, it would cost $7 billion, or $11 billion including debt. With analysts projecting EBITDA of less than $1 billion next year, funding a deal by borrowing four times that measure of earnings would mean using two-thirds equity, or a chunky $7.5 billion. Even then, assuming 5% revenue growth a year, 9% interest on the debt and minimal margin improvement, a buyer could generate nearly a 20% annualized return in five years, according to Breakingviews calculations.

Apply leverage equivalent to 6 times the company’s EBITDA, and the equity check shrinks, and the theoretical return under the same conditions, including an eventual sale at the same multiple paid, rises to 25%. It leaves a bigger margin for error, but it will be much harder for any buyout shop or lender to see clear to taking that level of risk.

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CONTEXT NEWS

Eye care company Bausch + Lomb said on Dec. 12 it was exploring a sale and other strategic options, following media reports that private equity firms are considering a buyout.

Blackstone would probably drop out of a consortium with TPG that had been working on a deal, the Financial Times reported on Dec. 10.

Parent Bausch Health separated Bausch + Lomb into a separately listed public company in 2022 and retains a nearly 90% stake.

(Editing by Jeffrey Goldfarb and Pranav Kiran)

((For previous columns by the author, Reuters customers can click on CYRAN/
robert.cyran@thomsonreuters.com))