Abbott finally gave investors the acquisition of their dreams -- but it didn't come cheap.
The medical-device company on Thursday announced it was buying St. Jude Medical for more than $30 billion including net debt. It's a transaction shareholders have talked about for years as a way to transform Abbott into a cardiovascular powerhouse and strengthen its bargaining power with hospitals seeking ever-lower prices on defibrillators, pacemakers and the like. Calls for such a transformational acquisition only grew stronger as Abbott's cash pile swelled. Here's how an Abbott investor put it last year:
“The one I dream about is for them to buy St. Jude. There are a ton of synergies and you could make it work."
That is about as excited as portfolio managers get!
And there's much to like about this deal. Abbott's medical-device business has lagged its peers, largely because its portfolio was kind of a random cluster compared to the broader, more integrated offerings at rivals such as Medtronic and Boston Scientific. That wasn't ideal for hospitals looking for one-stop shopping. St. Jude helps fill the holes in Abbott's catalog and brings an instant growth boost (plus about $500 million in annual sales and cost benefits by 2020). The target company is on track to drive mid-to-high single-digit sales growth in 2017 and beyond, versus low single-digit growth at Abbott's device unit, according to Leerink analyst Danielle Antalffy.
But oh, did Abbott have to pay up for all that. For each St. Jude share, Abbott is offering $46.75 in cash and 0.8708 of an Abbott share, equal to about $85 based on Wednesday's closing prices. That's a premium not only to St. Jude's recent share price, but to its highest price ever. At about 23 times St. Jude's Ebitda in 2015, it's on the pricey side for the health-care products industry.
Abbott says the multiple drops to just under 18 times Ebitda when you take into account the full-year impact of St. Jude's $3.4 billion purchase of Thoratec, which closed in October. That's still higher than the median for health-care product takeovers of more than $1 billion announced in the past five years, according to data compiled by Bloomberg. For example, Medtronic offered about 17 times Covidien's trailing 12-month Ebitda in its $53 billion purchase of the Dublin-based company last year.
Was it worth it? Probably. Abbott's stock fell as much as 8.8 percent on Thursday. But the company is issuing $3 billion in common stock to help rebalance its capital structure and fund the purchase (along with its previously announced $8.4 billion takeover of medical-testing company Alere -- more on that deal here). That's likely the bigger reason behind the stock-price decline, not investors hating on the St. Jude deal. Even with the high price tag and equity dilution, Abbott expects the St. Jude purchase to add to its earnings per share in 2017.
The one question Abbott will have to answer is whether the St. Jude deal goes far enough to ease the pressure from hospitals seeking to cut costs and become more efficient under Obamacare. The added scale should help. But Abbott is essentially doubling down on a market that's often dependent on government reimbursement and vulnerable to changes in health-care policy, as Bloomberg Intelligence analyst Jonathan Palmer noted when speculation about an Abbott-St. Jude merger surfaced last August. It's exactly the kind of market Abbott CEO Miles White has said he's trying to move away from, as he sought a more consumer-facing and emerging-markets-focused strategy.
It's worth noting that Johnson & Johnson seems to be shifting its focus more toward pharmaceuticals and has said it's not all that interested in commoditized, or soon-to-be-commoditized, areas of cardiovascular devices -- a label that could arguably be applied to a decent chunk of St. Jude's business. This likely means Abbott doesn't have to fear a counterbid from J&J, but it also means the company will have to prove investors were right to dream about this deal.
Update: This story has been updated to include a comment from Abbott.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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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