ICU Seen Extending Record With 21% Deal Premium: Real M&A

ICU Medical Inc., the maker of intravenous medical equipment that surged to a record this week after Bloomberg News said it’s considering a sale, could fetch 21 percent more in a takeover.

ICU advanced 13 percent May 8 to close at a high of $68.83 after people familiar with the matter said the company is working with JPMorgan Chase & Co. on finding suitors. While the gain left San Clemente, California-based ICU near its highest valuation relative to profit in almost five years, it’s still cheaper by that measure than most other U.S. medical device or equipment makers bigger than $500 million, according to data compiled by Bloomberg.

Roth Capital Partners LLC and CJS Securities Inc. said ICU should be valued at about $80 a share or more in a sale, implying a 21 percent premium to yesterday’s price. The $964 million company’s operating margin in the past year exceeded the industry median, and it’s projected to post record revenue and net income in 2014, data compiled by Bloomberg show. With no debt and the ability to generate cash from sales of disposable IV connectors, ICU could attract private-equity firms, as well as larger medical-device makers, said CJS Securities.

“We’ve always viewed them as a potential target,” Matt Dolan, a Newport Beach, California-based analyst at Roth Capital, said in a telephone interview. “Not only do they have decent revenue, but they also have a pretty good profit profile. I can see why it would be attractive.”

Tom McCall, a spokesman for ICU, said the company doesn’t comment on market speculation. A JPMorgan representative also declined to comment this week.

Drug Delivery

ICU makes devices used in drug infusions, such as needle-free IV connectors. The equipment lets doctors or nurses attach the feed from a saline bag or a dose of medicine into a patient’s IV port without the risk of being pricked by a needle and contracting a disease. Its Clave product line accounted for about 37 percent of last year’s $317 million of sales, and its largest customer is Hospira Inc., whose IV sets use ICU’s connectors, according to a regulatory filing.

Chairman and Chief Executive Officer George “Doc” Lopez, who founded ICU in 1984, may be among the beneficiaries of a sale. The 64-year-old is the company’s biggest shareholder, with an 11 percent stake that was valued at about $106 million yesterday, according to data compiled by Bloomberg.

Deliberations are in the early stages and ICU is still gauging interest, people familiar with the matter, who asked not to be identified because the process is private, said this week.

Sale Motivation

Lopez may have been prompted to consider a sale because high asking prices have likely prevented him from spending ICU’s growing cash hoard on acquisitions, said Lawrence Solow, an analyst at CJS Securities in White Plains, New York. ICU’s cash and equivalents totaled a record $234 million last quarter, data compiled by Bloomberg show. Lopez also doesn’t have an obvious successor should he want to retire, Solow said.

“They have stated publicly that the way to exist is to go out and acquire or get acquired,” he said in a phone interview. “They have a growing chest of cash and haven’t been able to find an acquisition that they truly like, so maybe at the end of the day they’re just going to say, ‘Let’s see if we can get acquired and go that route.”’

ICU shares have risen 8.2 percent since Bloomberg News’s report and may command even more in a takeover. Solow estimates a fair offer to be $80 to $85 a share, based on applying a multiple of 10 to his estimate of about $100 million of earnings before interest, taxes, depreciation and amortization for ICU next year. That would give ICU an equity value of about $1.2 billion.

Revenue Stream

People familiar with the matter said this week that the company is weighing a sale that may fetch more than $1 billion.

Roth Capital’s Dolan said a so-called strategic buyer, such as a large medical-device maker or medical-products distributor, could pay about $80 to $82 a share. Companies within the industry can probably afford to pay more than private-equity firms because of the potential for so-called synergies, he said. ICU’s stock closed at $66.10 yesterday.

Today, ICU’s shares climbed 1.7 percent to $67.25.

Part of ICU’s appeal is its profitability and recurring revenue stream, Dolan said. Hospitals need to constantly reorder products such as ICU’s connectors because they’re discarded after a patient uses them.

ICU earned almost 20 cents in operating profit for each dollar of sales in the past year, while the industry’s median margin is 14 cents, according to data compiled by Bloomberg.

Buyout Appeal

ICU’s ratio of enterprise value to trailing 12-month Ebitda rose May 8 to 9.5, approaching the highest level since 2008, data compiled by Bloomberg show. Yesterday, it still had a lower valuation than 83 percent of the industry.

The device maker’s free cash flow may lure financial buyers, said Alexander Yaggy, a New York-based money manager at Cortina Asset Management LLC, which oversees about $2.5 billion, including ICU shares. Still, Yaggy said he’d rather see the company return cash to shareholders than risk selling itself too cheaply and not get credit for the cash.

“This is a case where I think a material special dividend would be more appropriate perhaps than an outright sale,” he said. Returning the cash to shareholders “would result in a more optimal capital structure for the company and a less risky position for the outside shareholders.”

At the same time, CJS Securities’ Solow said that ICU has a lot of attributes that make it an appealing target and that Lopez may expect the company to fetch an attractive valuation in a sale.

“It’s been trading at a discount to the group, it’s underlevered, and it spits off a lot of cash per year,” Solow said. A strategic buyer “could keep them as an arm of the company, but it’s also just as likely to be private equity.”

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