Smiths Group Gets Approach for Medical-Equipment Division

Smiths Group CEO Philip Bowman
Smiths fanned speculation about a possible breakup in September 2007, when it appointed Philip Bowman as chief executive officer. Photographer: Chris Ratcliffe/Bloomberg

Smiths Group Plc said it received an approach for its medical-equipment business, more than two years after it spurned a 2.45 billion-pound ($3.7 billion) offer for the division.

The new approach for the business that makes critical-care and surgical products for hospitals may or may not lead to a transaction and the talks are at an early stage, the London-based company said in an e-mailed statement today.

The company, which also makes airport-security scanners, said in February 2011 that an offer for the medical business wasn’t good enough. People familiar with the matter said at the time that the offer came from private-equity firm Apax Partners LLP. Smiths should now try to fetch at least 3.1 billion pounds for the unit, said Bank of America Merrill Lynch analyst Alex Toms, adding that the major hurdle in any potential deal is the actuarial pension deficit of 650 million pounds.

The deficit “would require a substantial cash injection should medical be sold and management try to redistribute the proceeds to shareholders,” he said, adding that “valuation is also an issue in our view.”

To fetch 3.1 billion pounds for the business, Smiths would need to apply a valuation of 16 times enterprise value to earnings before interest, taxes and amortization, “which we believe is full in the context of M&A multiples in the space and Smiths Medical’s low growth profile,” Toms said.

Valuation Concerns

The stock rose as much as 4.8 percent in London trading today, after climbing 4.9 percent yesterday, and was down 0.4 percent at 1,384 pence as of 10:06 a.m., valuing the company at 5.4 billion pounds. The stock climbed 17 percent this year before today, while the FTSE 100 benchmark index gained 13 percent.

The Financial Times reported the approach for Smiths’s medical business yesterday, citing people familiar with matter and saying that one potential buyer would be U.S. rival CareFusion Corp.

CareFusion, which makes medical pumps, ventilators and medicine dispensers, yesterday gained as much 7.2 percent in U.S. trading after the FT report. Shares of the San Diego-based company have climbed 29 percent this year as a turnaround plan helped expand margins and health-care stocks led the Standard & Poor’s 500 Index.

Pumping Fluids

CareFusion, which has one business that makes devices for pumping fluids and drugs into patients and another that supplies antiseptic products applied before surgery, could be acquired by a private-equity firm and then broken into pieces to boost returns, Gene Mannheimer, a San Diego-based analyst at B. Riley, said last month.

CareFusion’s representatives couldn’t be reached immediately for comment.

Smiths’s medical division, which makes devices such as the Wallace embryo replacement catheter, employs 7,500 people with manufacturing concentrated in the U.S., Mexico and Italy. The medical business had sales of 856 million pounds in the 12 months through July 2012, representing about 28 percent of the company’s total revenue.

Smiths fanned speculation about a possible breakup in September 2007, when it appointed Philip Bowman as chief executive officer. Bowman had negotiated the sales of Scottish Power Plc and Allied Domecq when he was CEO of those companies.

Smiths, founded in 1851 as a watch shop, sold an aerospace division to General Electric Co. for $4.8 billion in May 2007, which left the U.K. company focused on X-ray machines and scanners for airports and hospitals.

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