Mallinckrodt, page-21

@The Yankee & @4Seasons

Thank you for the post regarding the sale of MNK's nuclear imaging business to IBAM.

The headline sale figure of $690m includes contingent consideration of $77m. Contingent consideration of up to $50 million would be paid in cash, if earned, based on the achievement of certain revenue targets for each of 2017-2021 and contingent consideration of up to $27 million would be paid in the form of vendor preferred equity certificates, if earned, based on the achievement of certain revenue targets for each of 2017-2019.


This business unit has been experiencing headwinds in both the Revenue and Profit line. From 2015 to 2016, Revenue decreased from $423.8m to $418.6m and Net Profit decreased from $71.6m to $61.3m. Considering this declining trend, it is not absolutely certain that MNK will earn the contingent consideration of $77m.

The price multiple achieved in the sale is not exactly high. If we only consider the up front payment of $574m and the average profit achieved over the past 2 years of $66.45m, the P/E multiple achieved is only 8.6.

After the sale, MNK will lose earnings contribution from the business unit. If they use the proceeds to invest in MSB, as @madamswer pointed a few days ago, MSB is unlikely to contribute any earnings, instead it will keep drawing capital from MNK's purse for the foreseeable future.

"In addition to the borrowing capacity under our receivable securitization program, we have a $500.0 million revolving credit facility. At September 30, 2016, we were not utilizing our revolving credit facility. As such there was $500.0 million of borrowing capacity under our revolving credit facility."

@The Yankee, I don't find any thing praiseworthy in the statement that you quoted from MNK's 10K. In fact, companies with stronger financial pedigree (such as let's say Abiomed), will not want to touch any of these debt facilities.

Receivable securitisation program is usually used by companies whose cash position is in urgent need of propping up. In order to get their hands onto the cash immediately, they are willing to take a haircut and securitise their account receivables.

Revolving credit facility is also another expensive form of financing. In return for the convenience and flexibility that this facility provides, the company has to pay various fees, such as establishment fee, commitment fee and higher interest rates.

If MNK has a stronger balance sheet, it doesn't have to resort to any of these expensive debt facilities.

By promoting these facilities as if they are beneficial, you are committing the common mistake of people with high outstanding credit card debt who is proud to have just been given an even higher limit by the bank. These people are usually oblivious to the dangers of financial ruin currently facing them right in the face.