This is a super simple one to understand. Bausch Health $BHC was at one time was debt-laden. You can make the case they still are: from 2015 to present, they've gone from $30 billion to $23 billion in debt. They've done an admirable job on that front, but the market hasn't given them a good valuation. I agree it doesn't really deserve much of one with that much debt on their book.

In August 2020, management decided to spin out their eye-care segment to unlock value for shareholders. https://www.nasdaq.com/articles/bausch-health-to-spin-off-eye-care-business-shares-soar-2020-08-06 They didn't end up executing the IPO of Bausch & Lomb $BLCO until May of 2022. In my opinion management really dragged its feet getting this IPO done. They discussed in early 2021 how they didn't feel market conditions were right for the IPO when we were obviously in the middle of a raging bull market. Then they decide to IPO in midst of a horrible bear market. Tough to understand their rationale, but the thesis doesn't rest on the strength of management, so bare with me.

Here is why they thought the spinoff would create shareholder value:

Here is how the owners of $BHC will eventually get shares in $BLCO. $BHC owns 90% of the shares outstanding. So parent-co's ownership comes out to 315,000,000 shares, which will eventually be distributed to shareholders. Since they have so much debt, you could make an argument that the company could theoretically sell these shares then use all proceeds to lower their debt burden. I see this as being very unlikely:

Unfortunately, point 1 above has not happened at all. In fact the exact opposite has happened. The spinoff happened on May 6th 2022, $BHC was trading for $16.04. The new spin-off initially traded for $20. As of July 17th, 2022 $BHC is $8.70, $BLCO is $15.59. But here is where things get interesting:

Buying $BHC shares today means means you get the parent co's business (which I don't find particularly interesting) and you'll eventually get $BLCO shares at a later date. How many will you get? Bausch Health currently has 361,479,708 shares outstanding. After the secondary IPO, they'll own 280,000,000 shares of $BLCO. This means every share should get .77 shares of $BLCO.

Here is where this idea get's super interesting. Even if this market stays with depressed prices, you make money. Let's say you buy a share of $BHC today for $8.70. You keep it until the secondary IPO and we assume the price stays the same (it was up to as much as $34.80 in 2021. You'll get 77% of the value of the $BLCO added to your holding, which as of today would be $12.00. So for $8.70, you are getting $20.70 of value.

Keep in mind that $BLCO is super depressed right now. Its market cap is $5.46 billion. Many analysts had this over $20 billion, when markets were in a better mood. They applied a EBITDA multiple of ~22x (which seems a little high to me). $821 million in EBITDA with a 22x multiple gets us a $18 billion market cap. One of $BLCO's main comps Alcon $ALC traded at that multiple. They have a different business model which I believe should give them a premium compared to $BLCO's multiple. The difference is that $BLCO has a few patents on products that will expire, and as far as I know Alcon doesn't.

So even if we take a more conservative evaluation of 15x EBITDA (it's currently trading at 6.6 TTM EBITDA), with zero growth, we get to $12.3 billion, $35.14 per share for $BLCO. In this bull case your one share of $BHC would increase in value to $35.75 with the added value from $BLCO assuming zero growth in the parent company. You could easily double the parent co's value and your number would increase to $44.45.

Let's say the secondary IPO happens in a year. The base case would yield you 130%. The bull case with zero growth in EBITDA but an earnings expansion gets you a yield of 310%. But we must now dig into the bear case.

I don't think the management team was great. I think they have integrity as I haven't seen anything to say otherwise. However, they dragged their feet getting this IPO going, then did the IPO at a horrible time. Given how they would've seen the declines in revenues for $BHC and very low growth rates in $BLCO, you'd think they would know the market wouldn't give them a great price on the IPO. Perhaps they were getting pressure from activists to just get it done.

The other issue is the timing of the secondary IPO. I have no idea when this will happen, or if there will be an additional lockup period after the secondary IPO. The longer they delay the secondary IPO, the lower your returns will be, but I do think it will happen. My guess is that they are waiting for the market to improve where they can do the secondary IPO. Hopefully this IPO would raise a lot more money to pay down debt to the parent co. So they're at the mercy of the market for when they'll do it.

As for the downside, BHC does have significant debt. But they've done a good job in reducing it, and are still generating $3 billion plus in TTM EBITDA. They haven't missed any interest expenses and it seems like they are going to keep paying it down. They have another asset in Solta, their medical device business (competitor with InMode). This is a high growth business that could be worth $2-4 billion. They say they would IPO this and full proceeds would go to paying down debt.

So I think bankruptcy risk is present, but it's a low probability event. The worst case I see is you hold onto $BHC for a longer time due to management dragging their feet. But even in this case, you would still end up profiting. If we look at a 2 year holding period, our base case would still get you a 54% CAGR.

I'd love to know if other investors on Commonstock own any $BHC or $BLCO? How do you think this narrative plays out? Let me know your thoughts and comments below. Thanks for reading!