Abbott Labs, having waited and waited for the right time to re-enter the deal sphere, finally saw an opportunity and pounced.
The $56 billion company said Monday it's buying Alere, a diagnostics business, in what will be its first major acquisition since spinning off AbbVie three years ago.
Alere's shares had taken a hit in the past six months amid weaker sales in Africa and Asia, a milder flu season in the U.S. and a subpoena from the Securities and Exchange Commission. That made it a cheaper takeover target.
The stock tumbled more than 20 percent in the six months through Friday, trading at a huge discount to analysts' average price forecast. In January, that spread was the widest point in at least five years. Most analysts maintained their "buy" ratings, noting that Alere's core business fundamentals were still attractive despite recent challenges.
This worked out perfectly for Abbott, which has been rumored as a suitor for companies from St. Jude Medical Inc. to Volcano Corp., yet hadn't really made its M&A strategy clear since the AbbVie split. Abbott CEO Miles White said on a January 2014 earnings call that he felt "constrained by what I view as a not terribly robust set of opportunities or valuations."
If he thought acquisition candidates were expensive then, imagine how he must have felt during the subsequent year and a half, when a record spate of pharmaceutical and biotechnology deals drove prices far higher. It wasn't until September of last year that drug stocks sold off, reaching more reasonable levels for dealmaking -- Alere included. In fact, on Abbott's earnings call last week, White said rich valuations caused the company to lose out on an auction for another target he didn't name.
Abbott has agreed to pay $56 a share in cash, or about $5.8 billion, plus Alere's $2.6 billion of net debt. That's about 15 times Alere's projected Ebitda for this year, which looks like a steal compared to some of the valuations we saw at the height of the industry's deal binge. (Many of the targets weren't even generating revenue or earnings yet.) Then again, it's not like Alere is sitting on a cancer cure. Rather, it makes devices to screen for HIV, malaria and other infections, as well as rapid flu and strep tests. Alere's revenue is forecast to climb to about $2.6 billion in 2017, a small gain from last year. Abbott sees almost $500 million in annual pre-tax synergies by 2019, but didn't distinguish between revenue synergies and cost savings (the latter is what drives earnings growth).
Now that Abbott has finally made its move, don't expect it to stop here. It has about $6 billion of cash and equivalents, and Bloomberg's merger calculator projects a proforma leverage ratio of around 2, which is still relatively low and leaves room to do more. Last month, Bloomberg Intelligence crunched the numbers and found that Abbott could increase debt to buy a company as large as $25 billion in market value without tapping its own shares. Plus, Abbott still has a 14 percent stake in Mylan worth about $3.6 billion. That's quite a bit of firepower, and slowing industry M&A could work further in its favor.
In other words, Abbott may have sat out of last year's deal frenzy but it looks like it was worth the wait.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Unlike Abbott, AbbVie wasn't shy when it came to dealmaking. The company got into a neck-and-neck bidding war early last year for Pharmacyclics, the developer of a blockbuster cancer therapy, ultimately paying about $20 billion. That was a whopping 156 times Pharmacyclics' trailing Ebitda, making it one of last year's priciest drug purchases. The target's Ebitda is projected to climb substantially over the next couple of years.
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