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

Target. Stand out from the crowd
Investing

2 Canadian Stocks I’m Buying Lots of This Year

I’m looking to snatch up exciting Canadian stocks like VieMed Healthcare Inc. (TSX:VMD) throughout 2023.

Read more »

grow money, wealth build
Dividend Stocks

Got $3,000? 3 TSX Growth Stocks to Buy in January 2023

Top TSX growth stocks that look appealing for 2023.

Read more »

woman data analyze
Dividend Stocks

Need Passive Income? Turn $15,000 Into $851 Annually

This passive-income stock is already climbing higher, up 16% in the last three months! Yet it's still valuable, so you…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

Retirees: 3 Reliable Canadian Dividend Stocks to Buy Now for Passive Income

Top TSX dividend stocks now appear oversold.

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Investing

2 TSX Stocks Safer for Investing in a Recession

These consumer companies will likely beat the broader market averages amid a recession. These stocks offer stability, income, and consistent…

Read more »

Dividend Stocks

For $100 in Passive Income Each Month, Buy 1,500 Shares of This REIT

REITs such as Northwest Healthcare can enable investors create a passive-income stream as well as benefit from capital gains.

Read more »

A colourful firework display
Dividend Stocks

2 Canadian Growth Stocks (With Dividends) to Start 2023 With a Bang

Here are two of the best dividend-paying Canadian growth stocks you can invest in at the start of 2023 and…

Read more »

sale discount best price
Dividend Stocks

4 Insanely Cheap Canadian Stocks to Buy for Passive Income

The recent bear market has created some incredible bargains, especially for those looking for passive income. Here are four cheap…

Read more »