Abbott’s Mylan Billions Open Door for Bigger Purchases: Real M&A

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Mylan NV’s three-way deal drama is putting the spotlight on a fourth player: Abbott Laboratories.

Abbott is the largest holder of Mylan after swapping its established-markets drug business for Mylan stock in February. Since then, Mylan shares have surged more than 20 percent as the drugmaker pursues Perrigo Co. and fends off advances from Teva Pharmaceutical Industries Ltd.

Mylan’s rise has added billions to the value of Abbott’s stake, leaving it at about $5 billion even after Abbott sold some of the shares, according to data compiled by Bloomberg. That gives Chief Executive Officer Miles White a bigger bankroll to spend on the acquisitions, big and small, that he’s looking for.

Investors “might get a little noisier about what the next steps are several quarters out if they don’t start to see how that money is being spent,” Jeff Windau, a St. Louis-based analyst at Edward Jones & Co., said by phone. “You’re going to see potentially more questions to management.”

Since splitting with AbbVie Inc. in 2013, Abbott has shied away from big purchases. Meantime, its former sister has pursued two blockbuster deals valued at more than $70 billion combined. Abbott instead has focused on rounding out its generic-drug offerings in emerging markets and adding new technology for the $69 billion company’s device and diagnostics businesses.

Abbott doesn’t need acquisitions to fuel growth in the same way that AbbVie does as a drug developer facing the expiration of its biggest product Humira, so Abbott may continue to steer away from big takeovers, said Jeff Vancavage, a fund manager at Abbott shareholder Eagle Asset Management Inc. Still, Abbott’s growing resources mean investors are going to be looking for more than $100 million deals.

Sweet Spot

A purchase of $2 billion to $4 billion may be in the sweet spot, said George Strietmann of Bahl & Gaynor Investment Counsel Inc. A takeover that ranked on the high end of that range would be Abbott’s biggest yet since splitting with AbbVie.

“They certainly have room to do a fairly good-sized acquisition,” Strietmann, a principal and fund manager at Bahl & Gaynor, which oversees about $14 billion, including shares of Abbott, said in a phone interview. “I would expect them to continue doing more fine-tuning of their businesses.”

Deal Capacity

On an April 22 call with analysts, CEO White said “I wouldn’t want you to think you’re only going to see ‘little’ out of me” and he can’t rule out bigger additions. Abbott still holds about 70 million of the 110 million shares it received from Mylan, data compiled by Bloomberg show. Abbott has the ability to do an acquisition of up to about $25 billion, said Jonathan Palmer of Bloomberg Intelligence.

If White wanted to be bold, he could transform Abbott into a cardiovascular powerhouse with an acquisition of St. Jude Medical Inc., said Jeff Jonas, a fund manager at Gabelli. St. Jude has a market value of $20 billion. Edwards Lifesciences Corp., a $13 billion company, is another big acquisition target that would build out Abbott’s cardiovascular business, said Igor Golalic of Diamond Hill Capital Management.

“The one I dream about is for them to buy St. Jude,” Jonas said. “There are a ton of synergies and you could make it work.”

Both St. Jude and Edwards Lifesciences are probably too pricey right now for Abbott, even if they would be ideal fits, said Jonas and Golalic. Diamond Hill owns Abbott shares among the $16 billion in assets that it oversees.

Scott Stoffel, a spokesman for Abbott Park, Illinois-based Abbott, declined to comment. A representative for St. Paul, Minnesota-based St. Jude also declined to comment, as did a representative for Irvine, California-based Edwards Lifesciences.

Perrigo Possibility

Another possibility would be to go up against Mylan in the pursuit of Perrigo. Abbott would be a better acquirer of the $30 billion company, Kyle Bass, founder of Hayman Capital Management, said at the SkyBridge Alternatives Conference in Las Vegas on Thursday. Abbott is one of the few large pharmaceutical companies that doesn’t have name-brand products that would compete with Perrigo’s store labels, Jefferies Group said last year.

Abbott’s acquisition strategy isn’t a matter of intent, but of timing, CEO White said in April. Market valuations and targets’ willingness to engage on a deal come into play, he said.

Whatever its next target, Abbott should make the most of the surge in Mylan shares and cash in its stake, said Vancavage of Eagle Asset, which oversees about $32 billion.

“They said from the beginning that they weren’t going to be long-term shareholders in Mylan and with this type of opportunity, it’s kind of hard to pass up,” the investor said by phone. “You don’t want to be left holding the bag.”

Buyback Option

If Abbott can’t find an acquisition, it will likely make a large share repurchase, said Palmer of Bloomberg Intelligence. Sitting on the cash isn’t an option.

“The cash pile will just get so big that the optics of it would be a negative in investors’ eyes if they don’t do something with it,” he said in a phone interview. “The CEO has been very vocal about wanting to do deals. They already did the big spin here with AbbVie so I think his track record speaks to being pretty willing to pull the trigger.”

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