Valeant, Capstone Higher But For Opposite Reasons

One company is a serial acquirer that faces a busted deal. The other just transformed the company in one fell swoop. Investors are cheering both today.

| More on:
The Motley Fool

Is that a whiff of corporate acquisition activity hitting the headlines?  And a completed deal in the mining space to boot?  Wow!

Shares of Capstone Mining (TSX:CS) and Valeant Pharmaceuticals (TSX:VRX,NYSE:VRX) are up by about 3% today.  One because they completed a deal.  The other because they didn’t.

The deal that clicked

Capstone announced the $650 million acquisition of BHP Billiton’s (NYSE:BHP) Pinto Valley mine in Arizona.  A combination of cash and credit will be used to fund the acquisition that will double the company’s production and firmly places Capstone amongst the world’s leading mid-tier copper producers.

Prior to this deal, Capstone carried no debt on its balance sheet and was therefore in a very good position to go shopping for assets.

Some view the price Capstone paid as too high.  Deutsche Bank had the value pegged at just $274 million, while RBC saw $600 million as a break-even price.  Capstone sees lower than expected cash costs of $1.80/lb over the next five years and a reserve base that could grow as justification for the price paid.

This deal takes BHP’s total asset sales over the past five months to $5 billion as the global miner trims its non-core operations.

And the one that didn’t

It appears that last week’s rumours of an all-stock merger between $22 billion Valeant and $13 billion Actavis (NYSE:ACT) will remain just that after talks reportedly broke down over the weekend.

From a balance sheet perspective, this deal looks frightening.  Although Actavis’ debt/equity ratio of 167% is relatively gorgeous compared to Valeant’s 297%, both are high.  Real high.

Valeant’s strategy to seemingly buy up everything in sight comes with a high-degree of risk.  At some point, they are bound to bite off more than they can chew.  These Valeant deals may look good in an analyst’s spreadsheet today, but that debt load is going to come back to bite if interest rates don’t co-operate.  Careful with this one.

Canadian investors deserve to own great businesses and the U.S. market is home to some of the best in the world.  We have created a special FREE report that identifies 3 U.S. businesses that are worthy of your hard earned investment dollars.  Simply click here to receive “3 U.S. Stocks Every Canadian Should Own” – FREE!

Follow us on Twitter and Facebook for the latest in Foolish investing.

Fool contributor Iain Butler does not own any of the companies mentioned in this report at this time.  The Motley Fool does not own shares in the companies mentioned. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

Aerial view of a wind farm
Energy Stocks

Is There Any Hope for Brookfield Renewable Stock?

Brookfield Renewable stock (TSX:BEP.UN) may be going through a rough patch, but recent moves suggest more is yet to come.

Read more »

Growing plant shoots on coins
Dividend Stocks

Better Buy in August: Passive-Income or Growth Stocks?

With a steady mix of passive-income and growth stocks, investors can create a prime portfolio even during market volatility.

Read more »

Woman has an idea
Stocks for Beginners

Why Canadian Investors Should Consider Investing in U.S. Stocks

In my opinion, U.S. stocks should be a large component of a Canadian investment portfolio.

Read more »

Money growing in soil , Business success concept.
Tech Stocks

The Smartest TSX Growth Stocks to Buy in July 2024

If you are looking for some smart growth stocks, here are four to look at right now.

Read more »

a person prepares to fight by taping their knuckles
Dividend Stocks

3 Defensive TSX Stocks for Lower-Risk Investors

These three TSX stocks are all high-quality companies with defensive businesses, making them ideal for low-risk investors.

Read more »

Paper Canadian currency of various denominations
Investing

Where to Invest $10,000

These companies have strong fundamentals with the potential to deliver solid capital gains.

Read more »

healthcare pharma
Investing

Up 23% This Year, Is WELL Health Technologies a Good Stock to Buy Right Now?

Given its long-term growth prospects and attractive valuation, WELL Health's uptrend could continue.

Read more »

ETF chart stocks
Dividend Stocks

2 Canadian ETFs to Buy and Hold Forever in Your TFSA

ETFs like iShares Canadian Quality Dividend ETF (TSX:DIV) have delivered admirable total returns.

Read more »