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.

Iain Butler

Chief Investment Advisor, Motley Fool Canada Fool since November 2012 Iain Butler is Lead Advisor for Stock Advisor Canada. He is also the Chief Investment Advisor for Motley Fool Canada. Before joining the Fool, Iain was a “buy-side” analyst and through this experience is well-versed in the idiosyncratic ways of the Canadian market. His investing interests are centred on scouring the market for interesting businesses that trade at reasonable prices and offer an appealing risk/reward relationship. Since joining the Fool in 2012, Iain dedicates each day to spreading Foolishness throughout this great country!

Published April 29, 2013 12:10 pm EDT

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.

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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.