Harry Rady News

Originally published on Reuters
by Dhanya Skariachan
April 7, 2011

NEW YORK, April 6 (Reuters) – Investing in top U.S. consumer electronics chain Best Buy is not for the faint of heart.

Best Buy’s shares have lost about a third of their value since November and touched a new 52-week low of $28.10 earlier this week. The stock has been in free fall since March 24, when Best Buy forecast a weaker-than-expected fiscal-year profit on sluggish demand for televisions.

The retailer also reported its third straight quarter of same-store sales declines as it lost bargain-hungry shoppers to online retailer Amazon.com Inc and mass merchants Target Corp and Wal-Mart Stores Inc.

Best Buy has admitted that consumers are showing little interest in newer technologies. Analysts also worry about its oversized stores and high overhead costs.

Still, the company has steady cash flow and its shares trade at 8.23 times forward earnings, smaller than the consumer electronics sector average of 10.41.

A GOOD TIME TO BUY?

Many investors say the retailer’s stock has hit a bottom.

“The pessimism about the company is overdone,” said Arnbjorn Ingimundarson, founder of Boston-based private investment firm Vitki LLC. “While it can be dangerous to try to pick a bottom, based on the last couple of days, it seems like the shares may have found a floor, for now.”

Some investors agreed.

“The stock is extraordinarily cheap and confidence in the management strategy is at an extraordinary low,” said Larry Haverty, associate portfolio manager of Gabelli Global Multimedia Trust, which owns 38,500 shares of Best Buy. “My hope is that it’s very close to a bottom. You very rarely see retail stocks sell at this cheap a price.”

There also have been no warning signs about the company’s profitability.

“There is nothing really in recent numbers to show that the profitability of the company is about to collapse. So basically I just see it as a very enticing valuation,” Ingimundarson said.

WHITE ELEPHANTS

But some investors, like Harry Rady, senior portfolio manager of San Diego-based Rady Asset Management, are waiting for the retailer’s shares to fall further before investing.

“At 25 bucks, Best Buy is a best buy,” Rady said.

Other investors have stayed away because of the questions surrounding Best Buy’s long-term prospects.

“While Best Buy is looking more and more attractive every day, we would still have questions of the long-term fundamentals of that business, the size of the store, and how to continue to manage the deflation we’re seeing across their products” said Matthew Lockridge, a buyside analyst at Westwood Holdings Group, which does not own Best Buy shares.

Industry experts urged Best Buy to shrink larger, older stores as many shoppers increasingly buy gadgets online.

“These (large format) stores were built for another era in consumer electronics retailing.” said Craig Johnson, president of Customer Growth Partners.”These stores, unless they are radically reconfigured or shrunk, are white elephants.”

“They either have to work out deals with the landlords to get out of these 10 to 20-year leases and shrink the square footage or they need to take that space and repurpose part of it,” Johnson said, suggesting options such as lending some space to a complementary retailer or subleasing space to carriers such as Verizon and AT&T.

Best Buy made one step in this direction in February by announcing plans to open more small format stores.

There has also been evidence of Best Buy losing market share in the past two quarters. But predicting the store’s future might be harder, said Wedbush Securities analyst Michael Pachter.

“We don’t really know for sure whether they will continue to lose share. It is probably prudent for most investors to just avoid having to make that call and find something else to invest in,” Pachter said.

Original Article: http://www.reuters.com/article/2011/04/07/us-bestbuy-idUSTRE73634B20110407

Originally Posted by Bloomberg
by Tara Lachapelle, Meg Tirrell and Rita Nazareth

Valeant Pharmaceuticals International Inc. (VRX)’s hostile bid for Cephalon Inc. (CEPH) is so low that Valeant could raise the offer by 15 percent and still pay less than any drug takeover in history.
The $73 a share proposal, which lifted Cephalon’s stock 28 percent to $75.44 yesterday, values the Frazer, Pennsylvania- based maker of sleep and cancer drugs at 5.3 times earnings before interest, taxes, depreciation and amortization, the lowest for any acquisition over $1 billion in the drug industry, according to data compiled by Bloomberg. The deal would still be the cheapest even if Valeant raised it to $84, the data show.

While Valeant’s Chief Executive Officer J. Michael Pearson said he wouldn’t get into a bidding contest for Cephalon, traders who wager on mergers and acquisitions are betting on a higher offer that Gabelli & Co. projects will reach at least $80 a share. Pearson says the Mississauga, Ontario-based company can profit from Cephalon, which faces competition from generic drugs and declining earnings, by cutting costs and selling money- losing assets. It would be the sixth deal by Pearson since September, during which time Valeant has surged 90 percent.

“There’s a general awareness this is a steal,” said Jack Ablin, chief investment officer at Chicago-based Harris Private Bank, which oversees $55 billion. “The deal is as cheap as I’ve seen and public companies rarely trade anything close to that. There could be a higher bid, but it would seem like a reasonable deal at least for Valeant and what they’re looking to do.”
Relative Value

Pearson said on a conference call with investors and analysts yesterday that Valeant was “paying very fair value.”

Natalie de Vane, a spokeswoman at Cephalon, said in a telephone interview today that the company’s board of directors will meet “early next week to further the process of maximizing value for Cephalon shareholders.”

Cephalon’s shares climbed 0.9 percent to $76.08 on the Nasdaq Stock Market today. Valeant slipped 0.5 percent to $49.81 in New York Stock Exchange trading.

Valeant offered to buy Cephalon in a March 18 letter, which it disclosed in a statement on March 29. The $73 a share bid valued the transaction at $5.46 billion including net debt, data compiled by Bloomberg show. At that price, the deal is 5.3 times Cephalon’s trailing Ebitda of $1.04 billion last year, the data show. That’s 65 percent lower than the median 15.1 times for all drug takeovers over $1 billion.
The acquisition becomes more expensive based on future earnings as patent protection losses erode Cephalon’s sales. The deal is valued at 6.9 times analysts’ estimates for Ebitda next year and 8.1 times for 2013, the data show.

‘Significantly More’
Shares of Cephalon climbed 3.3 percent above Valeant’s bid yesterday, indicating that arbitragers are betting on a higher offer. The level above the bid was the second-highest of all U.S. deals over $1 billion announced this year, the data show.

Valeant could increase its offer by $11 a share, or 15 percent, to $84 apiece and still acquire Cephalon for less than the 6.1 times Ebitda that Little Chalfont, England-based Amersham Plc agreed to pay for Nycomed ASA in July 1997 — currently the cheapest drug takeover on record, the data show.
While shares of Cephalon had the biggest advance since 1995 yesterday, Valeant’s U.S.-traded shares also jumped 13 percent, indicating the company has room to increase its offer without the risk of overpaying, according to Harry Rady, who oversees $270 million as chief executive officer of Rady Asset Management LLC, a hedge fund based in La Jolla, California.

“Valeant could raise their price by significantly more than 10 percent and the market would still like it,” he said.

Narcolepsy Drug
Valeant made its offer public after Cephalon lost 19 percent of its value in the prior 12 months.
Cephalon fell on concern its experimental medicines wouldn’t make up for the loss of revenue after its top-selling Provigil drug loses patent protection in 2012, Timothy Chiang, an analyst at CRT Capital Group LLC in Stamford, Connecticut, said in a phone interview yesterday.

Valeant, which in January forecast higher earnings this year than analysts estimated, expects to wring at least $300 million in cost savings from Cephalon, CEO Pearson said on a conference call yesterday.
The company will probably reduce research and development spending and cut jobs, while gaining Cephalon’s “significant” cash flow from its existing drugs, CRT’s Chiang said.

About 40 percent of Cephalon’s $2.81 billion in revenue last year came from Provigil, which is used to treat narcolepsy, a chronic disorder characterized by daytime sleep attacks. Cephalon’s cash flow from operations doubled in the past three years to $782 million in 2010, data compiled by Bloomberg show.

Barbados Tax Treatment
Valeant may also boost Cephalon’s after-tax profit because its operations in Barbados give it a lower tax rate. Valeant pays about 8 percent in taxes, while Cephalon pays closer to 30 percent, CRT’s Chiang said.
“They have a bunch of synergies they can bring to bear in terms of taxes and cost-cutting that will allow them to pay the highest price for this asset,” Eric Schmidt, an analyst at Cowen & Co. in New York, said in a telephone interview.

Valeant plans to fund the deal with debt and anticipates using cash generated by Provigil and the potential sale of Cephalon assets in western Europe to pay it down, Pearson said.

To complete the takeover, Valeant will need to raise $6.7 billion in debt, Pearson said. The company had $400.4 million in cash and equivalents versus $3.6 billion in total debt at the end of 2010, data compiled by Bloomberg show.

‘The Knock’
Valeant is rated B2H, one level below investment grade, according to Bloomberg’s Company Credit Ratings, which analyze borrowers based on indebtedness, profitability and other financial ratios. Adding $6.7 billion to Valeant’s long-term debt to account for the acquisition would lower its rating by three levels to B1H, the data show.

The company will also assume responsibility for Cephalon’s $1.04 billion of total debt, data compiled by Bloomberg show.

Valeant’s $1 billion of 6.875 percent, 8-year notes tumbled 1.69 cents, or 1.7 percent, to 100.25 cents on the dollar yesterday to yield 6.83 percent, according to Bloomberg prices. The drop was the largest since the debt was issued in November.

“The knock on Valeant is: can they continue to sustainably make these kinds of acquisitions, because this is how they’re going to grow,” said CRT’s Chiang. “Rather than do it via an R&D pipeline, you’re going to continue to buy companies.”

The valuation that Valeant is offering for Cephalon makes the acquisition worth the risk, according to Kevin Kedra, an analyst at Gabelli in Rye, New York.

“There’s room for Valeant to raise their bid and still have it be very attractive to them,” he said.
Overall, there have been 6,029 deals announced globally this year, totaling $583.8 billion, a 19 percent increase from the $488.9 billion in the same period in 2010, according to data compiled by Bloomberg.

To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Meg Tirrell in New York at mtirrell@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net.
To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Reg Gale at +1-212-617-2563 or rgale5@bloomberg.net.

Original Article: http://www.bloomberg.com/news/2011-03-31/valeant-offer-for-cephalon-still-lowest-drug-deal-with-15-boost-real-m-a.html