Opinions
Greg Dean
Concordia International Corp
CXR-T
COMMENT
Aug 02, 2016
Stock price when the opinion was issued
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He is pessimistic on this. They recently hired another set of advisors to advise them on capital structure. That usually doesn’t end well for equity holders. Just had so much debt. The big UK acquisition they made really went south on them in a hurry. Expects debt holders are either going to want a massive equity dilution or for some kind of bankruptcy and restructuring. The equity is probably close to worthless.
He loves turnaround stories with lots of debt. When you get them right, they really move. This one is not a turnaround yet. It has a lot of things that you look for, what it doesn’t have are signs of a turnaround. Wait until you see two quarters of deleveraging and improving margins. The stock will move from there. It still has bankruptcy risks.
She wouldn’t be buying this now, even though the stock price has come down dramatically from what it was a few years ago. This has only been public for about 4-5 years, and they’ve been buying assets. There is a lot of pricing pressure on the drugs they bought and paid a lot for. Has a lot of debt on their balance sheet. Debt to Enterprise EBITDA is over 11X. There is a big question as to how they are going to repay the debt when it comes due. Based on what they have now, it doesn’t seem sufficient.
It has lost the overwhelming majority of its value. It is burdened with leverage. It is important to step back and take a cold, clinical view of it. The market does not care what you paid for it. The prospects going forward don’t look very favourable for it. The subordinate debt went into default this week. The stock is more of a lottery ticket.
It is a very Canadian story. They are a drug manufacturer that were hit in a wave that took down others. He does not follow it closely, but a number of these stories have the ability to reconstitute themselves. They can find a way to make money at it or find someone to take them over.
This is an example of a “me too” strategy within healthcare. Canada, in many ways, becomes the sort of the winner’s curse market, where if you can take a business public and you get the highest multiple in Canada, it comes to Canada and doesn’t always make sense. You have to look at how they drive growth. For them, a big source of their growth was cutting, spending, both headcount and R&D, and then cheap debt. They were able to use a lot of cheap debt to fuel acquisition growth, which fed earnings growth, which got the market excited. If you are not fundamentally creating value in businesses you are acquiring, it is not a sustainable strategy.