Abbott Labs' Commitment Issues
Abbott Labs needs a plan B -- with or without a takeover of medical-test maker Alere.
On a call with analysts Wednesday to discuss earnings, Abbott CEO Miles White declined to commit to the $8.4 billion purchase of Alere that he had announced just months ago. Of course, back when White initially inked the transaction, Alere was dealing with just one government investigation; now it's fighting several regulatory fires (more on that later).
Shares of Alere fell as much as 18 percent on White's silence about the transaction. He was likely limited as to what he could say and declining to comment doesn't mean he's officially pulled the plug on it -- but at this point, perhaps he should. Or at the very least, there might be grounds to renegotiate the terms of the transaction.
The deal with Alere was an answer to investors who had been itching for the $65 billion company to finally spend some of its ballooning cash pile. 1 And the target offers a relatively cheap and accretive way to help round out its diagnostics business. But there have been just a few too many headaches and delays. At a certain point, Abbott has to decide if Alere is worth it or if its resources are better spent hunting for other targets.
Alere, which makes flu tests and devices to screen for malaria, said in November (months before Abbott announced its purchase) that the SEC was investigating certain tax treatments in its financial statements and sales practices in Africa. Disquieting, yes, but analysts at the time essentially dismissed the issue as little more than an annoyance. Abbott was presumably fine with all of this as well. Africa doesn't make up a huge percentage of Alere's sales and the worst-case outcome was probably fines and an acknowledgment of the situation in the footnotes of financial statements for the next few years.
Then, last month, Alere said it will file its annual report late because it's analyzing the timing of its revenue recognition in China and Africa. As such, it hasn't filed proxy materials for the Abbott deal or scheduled a shareholder vote. Alere also said it's been subpoenaed by the Justice Department, was examining Alere's practices in Asia and Latin America, in addition to Africa, as part of a U.S. Foreign Corrupt Practices Act investigation and was . These developments are a bigger deal because there's potentially a larger chunk of Alere's revenue at stake and a negative outcome could affect its competitive position in the countries involved.
Still, most analysts have said the deal with Abbott should go as planned. And they may be right that these investigations won't end up being that big of a deal, but it could take years to resolve the inquiries and who wants that kind of uncertainty? It's certainly not an ideal situation for Abbott in its first big M&A splash since splitting with AbbVie in 2013. There's also the matter of Alere's revenue growth, or rather lack thereof. Analysts don't project a real increase in Alere's sales until 2017, versus consistent gains at Abbott -- a point White got asked about again Wednesday.
If Abbott does decide to scrap the Alere deal or even if the company sticks it out, White will want to get an alternative takeover lined up. The company boosted its earnings guidance for the year on Wednesday and that takes away some of the pressure to buy its way to growth, but investors are still going to want to see a productive use of Abbott's mountain of cash. Something in the medical-device space -- a business that's underperformed at Abbott and one analysts were anticipating it would target first with a big deal -- could be a good move. Possibilities include stent maker C.R. Bard, St. Jude Medical or Edwards Lifesciences, which has soared in recent weeks after studies helped back the company's case for expanding use of its latest heart valve to a broader population.
The good news is Abbott will have plenty of money. Bloomberg Intelligence put its firepower at about $25 billion in January. Filings outlining the merger agreement with Alere appear to give specifics only for a reverse termination fee payable to Abbott should the target get a better proposal. If there is a breakup fee for the acquirer, it will likely be in the range of a few hundred million dollars -- nothing large enough to undermine its dealmaking abilities. Plus Abbott was already planning on continuing an aggressive acquisition hunt even if the Alere deal closed. Hopefully that means it has a good list of backup targets.
Abbott last year sold its established-markets generic drug business to Mylan in exchange for a stake in the drugmaker. Abbott sold about a third of its holdings last spring for net proceeds of about $2 billion, according to Mylan. It continues to hold a 14 percent stake that as of Wednesday would be valued at more than $3 billion.
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