CareFusion Cash Flow Seen Luring Buyout Firms: Real M&A

CareFusion Corp.’s medical pumps, ventilators and medicine dispensers have already attracted the attention of investors who sent the company’s stock to a record last week. Now, it could get a look from private-equity firms.

Shares of the San Diego-based company have climbed 23 percent this year as a turnaround plan helped expand margins and health-care stocks led the Standard & Poor’s 500 Index. CareFusion, which has one business that makes devices for pumping fluids and drugs into patients and another that supplies antiseptic products applied before surgery, could be acquired by a private-equity firm and then broken into pieces to boost returns, B. Riley & Co. said.

CareFusion’s surging stock price still values the company at almost 13 times the $619 million of free cash flow it generated in 2012, making it less expensive than 89 percent of U.S. medical equipment and device makers, according to data compiled by Bloomberg. It also has a cash hoard equal to 20 percent of its $7.9 billion market value, the data show, making a buyout of that size more feasible. CareFusion’s market-leading positions and recurring revenue stream add to its appeal as a takeover target, according to Bank of Montreal, which said there’s still room to improve profitability.

“It’s an attractive acquisition candidate,” Joanne Wuensch, a New York-based analyst at BMO Capital Markets, a division of Bank of Montreal, said in a telephone interview. “It’s definitely a cleaner company than it was a couple of years ago, but by no means is the process complete.”

Stock Rise

Jim Mazzola, a spokesman at CareFusion, said the company doesn’t comment on speculation, when asked whether it’s for sale or has been approached by leveraged-buyout firms. He reiterated CareFusion’s plan to spend $2 billion over the next three years on making its own acquisitions as well as repurchasing shares.

Since being spun off from drug distributor Cardinal Health Inc. in 2009, CareFusion’s stock has almost doubled. It closed April 11 at a record $35.39, and on average analysts project it will reach $36.50 within the next 12 months, estimates compiled by Bloomberg show. The shares ended last week at $35.29.

Today, CareFusion’s shares fell 2.7 percent to $34.33.

The 53 biggest U.S. health-care stocks have advanced 20 percent so far this year, topping all other industries in the S&P 500, as the U.S. awaits a potential influx of more than 30 million newly insured individuals under President Barack Obama’s health-care law. CareFusion’s gains also come as it begins the next phase of its turnaround, which has included shedding some units, making purchases and improving its operating margin.

‘Enviable Position’

“Today you’ve got a company where most of the heavy lifting is done,” Gene Mannheimer, a San Diego-based analyst at B. Riley, said in a phone interview. “It has market-leading assets. They’re No. 1 or No. 2 in every business that they’re in now. That is an enviable position to be in if you’re an acquirer and appealing from a private-equity standpoint.”

After three consecutive years of declines, CareFusion’s revenue increased last year to $3.6 billion, and the company is projected to add $184 million in sales by the end of the next fiscal year in June 2014, according to data compiled by Bloomberg. It earned about 19 cents in operating income for each dollar of sales last quarter, making it the most profitable period since the spinoff, the data show. In the same period two years ago, CareFusion’s operating margin was less than 16 percent.

“As investors are getting more interested in medical technology stocks, this one stands out as a company that has a fair amount of operating margin expansion,” BMO’s Wuensch said.

Still Cheap

CareFusion shares are still relatively cheap versus its earnings and cash flow. At 8.6 times trailing 12-month earnings before interest, taxes, depreciation and amortization, its valuation trails 87 percent of U.S. medical equipment and device stocks that have market values exceeding $1 billion, data compiled by Bloomberg show. Its price-to-free cash flow multiple of 12.7 is a 37 percent discount to the industry median, the data show.

A private-equity suitor could seek to unlock some of that value by purchasing the company and breaking it apart, said B. Riley’s Mannheimer. While CareFusion currently reports two segments, it could be divided into four, he said.

One unit could be infection prevention, which includes its ChloraPrep antiseptic that’s applied to a patient’s skin prior to surgery, according to Mannheimer. The other three could be infusion pumps, respiratory products such as ventilators, and medication dispensing, which uses barcodes to help hospitals avoid giving patients the wrong drug, he said.

“There are some very discrete components of CareFusion that could be broken out, and private equity may be interested in one or more of those,” Mannheimer said.

Combination Opportunity

Another option would be for a financial buyer to combine CareFusion with another provider of hospital equipment such as Hill-Rom Holdings Inc. While neither company has shown any interest in merging, CareFusion and Hill-Rom, a maker of hospital beds, sell to many of the same customers and are focused on addressing similar hospital needs, according to Matt Miksic, a New York-based analyst at Piper Jaffray Cos. Given each company’s cash flow and capital structures, they could be logical targets for a private-equity suitor, he said.

Hill-Rom, which has a market capitalization of $2.2 billion, has just $242 million of net debt and generated $189 million in cash from operations after deducting capital expenses in the last 12 months, data compiled by Bloomberg show.

“Both are focused on many of the same needs and wants” of hospitals and patients, Miksic said in a phone interview. If a private-equity firm wanted to “roll up the assets in a category and roll them back out as a larger asset, that’s certainly something that would make sense here. Strategically, they would line up pretty nicely. They both have these great franchises, throw off a lot of cash and screen well for an LBO-type model.”

Tough Sell

It may be a tough sell to current management though, he said. Hill-Rom Chief Executive Officer John Greisch has indicated that infusion pumps -- one of CareFusion’s main businesses -- isn’t an area he’s interested in. Likewise, as CareFusion seeks to drive better growth over the next few years, management may be reluctant to take on the slower-growing hospital-bed franchise, Miksic said.

Larry Baumann, a spokesman at Batesville, Indiana-based Hill-Rom, declined to comment on whether it has considered combining with CareFusion or received interest from buyers.

Past acquisitions suggest CareFusion could command a higher Ebitda multiple than the 8.6 it currently trades for. Deals valued at more than $1 billion involving makers of health-care products were struck at a median 16.6 times Ebitda, data compiled by Bloomberg show. The average premium was 32 percent, which when applied to CareFusion’s average price in the last 20 days implies a takeover offer of almost $46 a share, the data show.

“Private equity would have an interesting time deciphering these businesses and determining fair value,” B. Riley’s Mannheimer said. “It would probably have a break-up value that’s worth more than the whole.”