Two years ago, Morgan Stanley got its hands dirty defending Mississauga, Ontario–based Biovail Corp. in a proxy fight with its controversial founder. The successful outcome against Eugene Melnyk ensured that the bank would be the pharmaceuticals company’s go-to adviser for its merger with bigger rival Valeant Pharmaceuticals International.
“We were advising Biovail in 2009 when the company started talking to Valeant about possible commercial agreements on certain products,” says Joseph Modisett, 34, a managing director in health care banking at Morgan Stanley. “Those discussions then evolved as the benefits of a merger became clear.”
Morgan Stanley had a strong historical relationship with Biovail chief executive William Wells, who retained the firm shortly after taking charge in 2008. Wells knew he would need a bank with a thorough understanding of the company’s structure if Biovail was to cut a deal with Valeant.
Although Canadian, Biovail was registered in Barbados and enjoyed a corporate tax rate of less than 10 percent, which gave it a competitive edge despite its size. With a market capitalization of $2.3 billion, it was dwarfed by $3.9 billion, Aliso Viejo, California–based Valeant. Biovail had to find a way to structure the deal as a merger of equals, or it would lose its tax status.
Morgan Stanley’s team drew on its years of experience to come up with a plan. Mergers of equals are usually all-stock deals, says Michael Boublik, the bank’s chairman of M&A for the Americas. “But given the disparity in size, we needed to find a way of bringing the two companies together while maintaining a majority ownership position for Biovail shareholders,” he notes.
The solution was to pay those shareholders an appropriate premium and give Valeant shareholders a predeal equalization dividend of $1.3 billion to bridge the market-value gap. This would reduce Valeant’s size and bring Biovail up to the 50 percent threshold needed for a merger.
To avoid any risk of leaks, Boublik and Modisett brought Whitner Marshall, head of North American leveraged finance, onto the deal. Morgan Stanley provided almost half of the required $3 billion in the form of senior secured credit facilities, with the rest coming from Goldman Sachs. The facilities also had to fund repayment of existing Valeant debt.
“The share prices of both companies rose when the deal was announced, which is highly unusual in a merger of equals and demonstrates that shareholders understood the value that was being created,” Boublik says. “The combined company achieved greater scale, diversity, significant synergies and an efficient corporate tax structure.”
The involvement of Morgan Stanley’s leveraged finance arm ensured that the firm earned advisory and financing fees. Its total fee was $21.7 million, according to Freeman & Co. Goldman Sachs, co-adviser to Valeant, earned an estimated $24.5 million for investing as a principal, while Jefferies & Co., another Valeant adviser, scooped up an estimated $15 million.
