Written by Scott Matusow
On Monday, December 16th, Valeant (VRX) submitted what for the time being, is the winning bid to acquire Solta Medical Devices (SLTM). For some time now, we have been predicting that Solta would be acquired before the end of this year. Before that, we successfully predicted that Obagi Medical devices would be acquired, and in early 2013 it was, again the winning bidder was Valeant. Concerning the latest bid by Valeant to acquire Solta, we are not so sure the story is "said and done," as we believe based on Solta's bid action, Zeltiq (ZLTQ) might step up and submit a bid via a share swap to acquire Solta. As I mentioned in a prior article, Zeltiq cannot allow Valeant to acquire Solta, and allow Valeant's top sales force to effectively lever Solta's products in a manner that could sink Zeltiq. Zeltiq has but one asset it currently sells, CoolSculpting, which will not be able to sustain its current revenue stream, nor will Zeltiq succeed with just one asset it sells.
Regardless of how the Solta situation turns out, Valeant is not going anywhere, so Solta is going to be acquired, either by Valeant or a higher bidder.
So what is the likeliness of another bid coming in for Solta here? I think it's a rather good chance. First off, I have to ask myself why the bid has constantly been over the agreed buyout price of $2.92 a share, and a stock price reaching as high as $2.97 last week? It seems to me that there should be no hurry for Valeant to want to grab shares now at a higher price. This leads me to strongly suspect that Zeltiq (or another company) might be ready to submit a substantially higher bid. If the deal with Valeant is the last and best bid, why the apparent hurry to bid higher for shares now?
Zeltic was once again upgraded this past Friday by Canaccord from their original high target of $16 to an absurdly higher target of $22. This would represent a market cap of over $800M, for company on track to do a maximum of $120M over the next year, a long ways from being profitable, and which does not take into account the potential damage Valeant can and will likely do to Zeltiq's revenue stream if its deal with Solta goes through. This represents nearly a 10 to 1 ratio in price to sales, a number unheard of in the aesthetics device field, yet alone for a single asset company like Zeltiq. These kind of numbers are only justified in developmental biotechs, not aesthetic device companies!
On November 7th, Zeltiq announced a "public offering" of 4.5M shares priced at $12.22. However, the company is not offering the shares, but rather "certain private investors" in the company. The buyers of these shares are JPMorgan (JPM) and Goldman Sachs (GS). What is the purpose for this so-called public offering? It clearly seems to me that Zeltiq is positioning itself to make a strategic acquisition via a share for share swap deal. This is the company's only play with $43M in cash on hand. It does not have the leverage to offer a cash for shares deal unless any such deal would be for a small private company. I have yet to identify such a company that Zeltiq might have its eyes on. The recent big pop in Zeltiq's share price can be for one reason only -- a share for share swap for a company with a valuation of at least $250M.
Since the offering was announced, Zeltiq stock has soared, touching over $17 in a matter of a few days, and recently passing the $18 mark. It's obvious to me Zeltiq's stock price is being held artificially high here. Additionally, because of its current market cap of over $650M for a single asset aesthetics company, it does not make for a strong acquisition target for Valeant or anyone else at this time. Any company paying this price would be grossly over-paying, especially with other companies out there with strong assets that can be purchased at considerably less than half the price, as Valeant has done with Solta.
After conferring with several experts in the aesthetics device field, including David Callan, the consensus on Zeltiq now is that it is grossly overvalued, and faces potentially tough times ahead if Valeant's deal to acquire Solta ends up going through. At a recent conference, Zeltiq had a hard time offering any solid guidance moving forward, and its research and development, while quite good, is still over a year or so away from introducing any new products.
How can a single asset company's business thrive with Valeant, an industry giant, now "playing" in their "backyard" with Solta's assets in hand?
As mentioned, we don't think they can thrive in this situation, hence is why we believe they have to submit a bid to get Solta into their hands, if for nothing else than a defensive move to protect "their turf." Valeant is a multi-billion giant, with sales forces second to none. Zeltiq's chances of competing with them with its single asset is slim to none in my mind.
I have not sold a single share of my 150k plus position in Solta yet. For one, there is no reason to as any sale this year would count towards this year's taxes. Another reason which I highlight in this article is a higher bid coming in here acts as icing on the cake for Solta shareholders.
Could I be wrong here? Sure I can, but when considering each and every factor in this case, I don't think so, but time will tell how this story plays out -- stay tuned!
Additional Disclosure: Disclaimer: This article is intended for informational and entertainment use only, and should not be construed as professional investment advice. They are my opinions only. Trading stocks is risky -- always be sure to know and understand your risk tolerance. You can incur substantial financial losses in any trade or investment. Always do your own due diligence before buying and selling any stock, and/or consult with a licensed financial adviser.