Now we know what really scares Bill Ackman about Valeant

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For weeks Pershing Square chief Bill Ackman has been poo-poohing the controversy surrounding his largest holding, Valeant Pharmaceuticals.

He’s said that concerns about its relationship with a shady specialty pharmacy called Philidor don’t “rise to the level of materiality.”

He’s also said that concerns that Valeant’s business model is dependent on drug price increases are also unfounded.

Valeant’s issues, he said on a conference call on Monday, are simply a “PR” problem combined with a series of unfortunate, unrelated events.

That said, it seems there’s one concern about Valeant Ackman can’t shake — the company’s $US34 billion debt pile.

Bloat

On the call, Valeant’s debt seemed to be the only part of the company’s current troubles that made Ackman pause and reflect.

Valeant, he said, is a “more leveraged” business than any Pershing has ever owned before. That was the only point during the call when he mused that perhaps he should have shrunk Pershing’s position in the company.

This debt point is key. Standard and Poor’s on Friday downgraded its outlook on Valeant’s credit to negative, while the Federal Reserve could soon raise interest rates, making Valeant’s debt load more onerous.

Valeant is a platform company — a huge corporation that grows through acquisitions. Unfortunately, if you have a ton of debt you can’t really do a bunch of acquisitions. Ackman doesn’t think Valeant will do any for the next 18 months.

Valeant is a “classic example of a platform company delevering,” Ackman said on the call. He left it at that.

Roger altmanBloomberg TVRoger Altman, chief executive of Evercore ISI

What Ackman didn’t mention, though, is how bad some of those “classic” examples have looked in the past. This is something Wall Street has been thinking about a lot lately.

At a conference last month, James Litinsky of the Chicago-based fund JHL Capital Group presented a thesis comparing what happening in the market now, to the 1960s boom (and subsequent bust) of big conglomerates.

Like Valeant, these companies relied on acquisitions fuelled by low interest rates to grow. When interest rates rose, and companies couldn’t do the deals they did before, the conglomerates started to crash.

“We’ve seen periods when conglomeratization went too far, and one of the reasons you’re seeing so many de-mergers, and split-ups, and so many activists are pushing for that, is we saw too much of that,” Evercore ISI CEO Roger Altman said in an interview on CNBC last Monday.

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