Deals

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

The fraught mess that is Abbott Laboratories' takeover of medical-test maker Alere Inc. has resulted in one very smart deal … for another company.

Abbott Labs tried for months  to get out of its purchase of Alere as government investigations mounted at the target company and accounting questions forced it to delay regulatory filings. Faced with a less-than-airtight legal case, it eventually agreed to see the deal through at a lower price of $5.3 billion excluding debt. One of the last tasks before wrapping up the deal is sorting out the divestitures requested by European antitrust regulators. On Monday, Alere announced that some of those businesses would be sold to Quidel Corp. for as much as $440 million including contingency payments. And Quidel holders were ecstatic:

Yeah!
Quidel shares had jumped 11 percent as of midday July 18. That's after a more than 25 percent spike Monday. It's unusual for an buyer to rise on deal news, let alone by that much.
Intraday times are displayed in ET.

Some short-covering may have contributed to the surge, but there's a lot to like about this deal, and good reason for the rally. The businesses Quidel is acquiring sell cardiovascular, toxicology and B-type natriuretic peptide (BNP) blood tests and should help it diversify away from a focus on flu tests for which demand can fluctuate wildly. William Blair & Co. analyst Brian Weinstein estimates Quidel will get about 18 percent of its revenue from flu tests after the deal, down from 37 percent now. It will also get a bigger presence in international markets that are growing faster than its American home base. Not to mention Quidel will just be bigger in general: the purchase will double its revenue.

The best part is, this deal is cheap. That's not just a novelty in its industry, but a unique trait at a time when many takeovers have arguably been overpriced, sending goodwill skyrocketing. Quidel is paying roughly 2.2 times the businesses' $197 million in revenue for 2016, after accounting for the contingency payment. That compares to the about 3 times sales Abbott is paying for Alere at the reduced takeover price, a multiple that's essentially in line with the median for recent U.S. diagnostic-equipment takeovers.  

Bargain Hunter
Quidel is buying strategically valuable assets on the cheap -- not an easy thing to do these days
Source: Bloomberg
Note: Data for Alere takeover is based on the company's reported revenue and net debt as of the end of 2016. Medians are based on deals of more than $100 million since the start of 2015.

Canaccord Genuity analyst Mark Massaro bills Quidel "Alere 2.0" -- a label I'm sure it just loves -- and highlights its uniqueness as one of the few remaining big point-of-care-focused companies in a sector that's been inclined toward dealmaking. Quidel may in fact wind up a takeover target itself, but it should hope that process is nothing like Alere 1.0.

On the bright side, Alere did actually manage to finally file its annual report in June -- just a few months late. It disclosed in its first-quarter results that the Department of Justice was closing an investigation into Medicare, Medicaid and Tricare billing information for its pain-management laboratory in Austin, Texas and was seeking no action against the company. Unfortunately, Alere also said it was unable to predict when an SEC inquiry into its financial revisions and some sales practices would be resolved. The same goes for a Foreign Corrupt Practices Act investigation by the DOJ.

Meanwhile, Alere's Arriva diabetes unit is also still twisting in the wind after the government accused it of submitting bills for dead people. In April, a judge upheld the revocation of Arriva's Medicare billing privileges. Alere is appealing, but in the meantime, it's spending millions of dollars to send out testing supplies it can't get reimbursement for -- a bill the company had previously cautioned could put Arriva out of business. Amid all the struggles, Abbott now doesn't expect the deal to give as much of a boost to its earnings and sales as it had initially anticipated. 

The remaining government investigations may end up fizzling out. Alere's businesses aren't total garbage, and Abbott should be able to improve their profitability. It's worth remembering, however, that analysts didn't have high hopes for Alere's sales even before things turned so sour.

It's Not Just the Subpoenas
Analysts have been getting increasingly pessimistic about Alere's revenue for a while now. Sales have declined for the past four years.
Source: Bloomberg

There's already some speculation that Abbott may need to break itself up (again) to free up resources to pursue growth boosting M&A. Quidel may wind up getting the best end of this drama. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. This excludes deals smaller than $100 million. 

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net