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Is Varian Far More Than Its Parts?

Inside Wall Street


When Varian Associates (VAR) announced on Aug. 21 that it would spin off two of its three businesses, its stock popped up nearly 7 points, to 43 a share. But much of that gain melted in a couple of weeks when investors sensed that profits from its semiconductor-equipment business would come under pressure. Indeed, on Sept. 25, Varian warned that fiscal fourth-quarter earnings would be disappointing.

No matter, says Joseph Cornell, president of Spin-Off Advisors, a Chicago firm that specializes in finding inefficiently priced stocks involved in spin-offs. Varian's stock, now at 35 1/4, is below its sum-of-the-parts value, argues Cornell. "The market is placing a value of $1.1 billion on the stock; we believe Varian's three separate businesses will garner a higher market value as separate companies--a total of about $1.5 billion, or $50 a share," Cornell says. Varian has three core businesses: health-care systems, analytical instruments, and semiconductor equipment.

Varian will spin off to shareholders its health-care and instruments operations. The health-care unit, which makes X-ray tubes and radiation machines for cancer treatment, should have 1999 revenues of $570 million and aftertax profits of $40 million, estimates Cornell. This business, he figures, is worth about $22 a share, based on a price-earnings multiple of 17, vs. an industry p-e of 20. The instruments unit, which makes lab and analytical tools for chemical analyses, should have sales of $615 million and earnings of $28 million. At one times sales, it is worth $20 a share, he estimates.

Varian's semiconductor unit makes and services ion-implantation systems--a key step in producing chips. Most of the major chipmakers use its equipment. Because of weak sales, Cornell expects that the unit's 1999 sales will fall to $275 million, from 1998's estimated $424 million. Profits, he adds, should drop to $5 million, from $10 million. He values the unit at 90% of sales, or $8 a share.BY GENE G. MARCIALReturn to top

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