Abbott's Eye Deal Isn't About Alere
Abbott Labs hasn't had the best luck this year as far as deals go, but it seems to have gotten some of its M&A mojo back with its latest transaction.
The $62 billion medical-device company announced late Friday that it's selling its eye-surgery equipment unit, Abbott Medical Optics, to Johnson & Johnson for $4.33 billion. Unlike its planned takeovers of St. Jude and Alere -- which have been questioned from a strategic standpoint and ran into some nettlesome issues, from accusations of cybersecurity risk at the former to accounting missteps at the latter -- there's nothing not to like about this divestiture. It makes sense no matter how you look at it.
Abbott has said it wants to focus on core areas where it can be a leader; it may have been hard-pressed to do that in vision care. The company's offerings for Lasik vision-repair procedures and cataract surgery were top notch, but it lacked a strong contact lens portfolio to market in parallel with surgical equipment. J&J, on the other hand, had $2.6 billion in sales last year from its unit that sells Acuvue contact lenses.
Rather than going down the difficult path of trying to build up its presence in the already competitive lens market, Abbott has found a good home for a division that didn't really have that much in common with the rest of its device business anyway. For one, it was slower-growing and less profitable than other parts of the company. Getting rid of it should boost corporate Ebit margins by as much as 50 basis points, and add about that much to Abbott's revenue-growth profile, said Stifel analyst Rick Wise. And the company is getting a pretty good price, too.
Abbott acquired the bulk of its eye-treatment business through the 2009 purchase of Advanced Medical Optics for $2.8 billion. It then added to the division with the $400 million acquisition of Visiogen that same year, followed by the takeover of OptiMedica in 2013 for $260 million plus milestone payments. So Abbott is getting more for the division than what it paid to build it through those three deals -- even though revenue at the division last year was only marginally higher than 2010's sales.
The purchase price works out to about 3.6 times the $1.2 billion in sales that Wells Fargo analyst Larry Biegelsen estimates Abbott Medical Optics will bring in for 2016. That compares to the less than 3 times projected sales that Valeant paid for Bausch & Lomb in 2013 (the eye-care unit is one of the struggling pharmaceutical company's best divisions).
Abbott investors likely enjoy being on the other end of a high price tag this time around, but the greatest financial benefit of this deal is that it may eliminate the need for Abbott to issue $3 billion of equity to help fund its St. Jude and Alere takeovers. Abbott hasn't publicly confirmed the status of its plans for an equity raise. The company did, however, say that this transaction won't affect its 2017 EPS target, which suggests that the earnings lost from divesting Abbott Medical Optics will be offset by not having to dilute shareholders with more stock.
If the equity issuance is indeed shelved, it makes Abbott's decision to tackle two large deals at the same time more stomach-able for investors. But it doesn't mean that Abbott is going to actually do both deals, as much as Alere shareholders seemed to hope was the case when they sent the company's stock up about 2.7 percent on Friday.
Yes, avoiding the equity raise puts Abbott in a better financial position, but it was entirely capable of paying for both deals before this extra cash infusion. If anything, one of Alere's arguments against Abbott just got weakened: that the company was trying to get out of the deal to avoid being too financially stretched. The real crux of the issue from Abbott's perspective is the multiple government investigations into Alere. The J&J transaction does nothing to allay those concerns.
Who knows, the Alere deal may still get done. The companies have agreed to mediation after Alere tried to sue to force Abbott to complete the transaction. But reading too much into Abbott's divestiture would be a mistake, at least as far as Alere implications go.
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