Hologic With Icahn Seen Primed for Takeover Bid: Real M&A

Carl Icahn’s activist push to enhance value at Hologic Inc. may turn one of the cheapest medical-equipment makers in the U.S. into a takeover target.

Icahn disclosed a 12.6 percent stake in Hologic last week and said he would talk to management about ways to boost the shares and may seek board representation. The investor’s likely goal is a sale of the $6.1 billion maker of cervical and breast biopsy tools, which could appeal to industrial conglomerates such as Siemens AG or Danaher Corp., or a consortium of private-equity and strategic bidders, said Cantor Fitzgerald LP.

While Hologic adopted a poison pill, the step is unlikely to thwart Icahn with other shareholders poised to rally around efforts to push up the stock, said International Strategy & Investment Group LLC, which now sees a 100 percent probability of a sale of all or parts of the company. Hologic trades at a cheaper profit multiple than 88 percent of U.S. peers, according to data compiled by Bloomberg. Hologic may lure buyers for its individual units and Icahn could accelerate divestitures as it undergoes a review, William Blair & Co. said.

“This is a stock that has been screaming for an activist for awhile,” Jeremy Feffer, a New York-based analyst at Cantor Fitzgerald, said in a phone interview. “The size of the position he’s taking plays a role here. He’s serious. My sense is that the board currently is not looking at very dramatic changes. He is probably the person to get them to change that thinking.”

Deborah Gordon, a spokeswoman for Bedford, Massachusetts-based Hologic, declined to comment on whether the company would consider a sale of the company, divisions, or assets, or whether the company had received interest from suitors.

Weighing Options

Hologic has four main business units: diagnostics, which makes blood screening and pap test tools; breast health, which sells mammography technology; gynecological surgical, which markets NovaSure for excessive menstrual bleeding; and skeletal health, which produces devices that measure bone density.

The company, which this month reported its fifth loss in six years, is already reviewing ways to get the most out of its resources. Hologic forecast a sales decline for fiscal 2014, which ends in September, amid weaker demand for its pap test, blood screening and NovaSure products. Management has also faced criticism for overpaying in its 2012 takeover of Gen-Probe Inc.

“The company has destroyed value,” Jonathan Groberg, a New York-based analyst at Macquarie Group Ltd., said in a phone interview. “Their core business is declining. It’s massively underperformed the market.”

Trailing Peers

Hologic had risen about 11 percent this year before Icahn disclosed his stake, compared with a 43 percent gain for the Standard & Poor’s MidCap Health Care Index. The stock now trades at 16.6 times its projected earnings for this fiscal year, compared with the median price-earnings ratio of 20 among U.S. medical equipment and device makers valued at more than $1 billion, according to data compiled by Bloomberg.

Icahn said in filing disclosed on Nov. 21 that Hologic shares are undervalued and that he planned to have conversations with management about improving shareholder returns. He also said he may seek board representation. Icahn didn’t respond to a request for comment left with his assistant.

The activist investor began building his stake, which consists of both common shares and options, on Oct. 4, according to the filing. His average cost basis was about $21.40 a share, according to Feffer of Cantor Fitzgerald. Hologic closed last week at $22.57.

Today, Hologic shares fell 0.7 percent to $22.41.

Big Investment

The size and cost of the investment signal Icahn will “probably angle for a sale of the company,” said Feffer. An industrial conglomerate such as Siemens, Royal Philips NV or Danaher, which all sell diagnostics tools and capital equipment, may possibly be drawn to Hologic’s diverse businesses, said Feffer and Vijay Kumar, a New York-based analyst at ISI.

Danaher Chief Executive Officer Larry Culp has said the $52 billion company has the capability to do more than $8 billion in deals through 2014 and is eyeing 225 M&A target opportunities.

Hologic may fetch about $27 a share in a sale, said Kumar. If the company isn’t sold outright and Hologic instead decides to restructure its businesses, that still would require some divestitures to reduce debt, he said.

Another option, which could result in a higher valuation for the assets, is to sell the company in pieces to a consortium of private-equity and strategic buyers, with each suitor taking the piece that’s most attractive to them, Feffer said.

Icahn could accelerate the company’s review by encouraging it to sell some assets that may not be on the chopping block, said Brian Weinstein, a Chicago-based analyst at William Blair.

Valuation View

“The company’s view of what the valuation is versus his view could be very different,” Weinstein said in a phone interview. “Potentially he could encourage the company, gently of course, to consider different alternatives.”

Weinstein estimated Hologic could be worth about $30 a share, based on the sum of its parts, if its finds buyers for its pieces.

Hologic could spin off or sell part or all of its diagnostics unit, which may appeal to Siemens or Danaher, or divest its gynecological surgical division, which could lure medical-device makers C.R. Bard Inc. or Boston Scientific Corp, said Michael Matson, a New York analyst at Needham & Co.

Representatives for Amsterdam-based Philips, Munich-based Siemens and Washington-based Danaher declined to comment on a potential acquisition of Hologic. Representatives for Natick, Massachusetts-based Boston Scientific and Murray Hill, New Jersey-based C.R. Bard didn’t respond to requests for comment.

Not Easy

Selling the gynecological surgery and diagnostic units may be problematic because Hologic needs the cash flow they generate to pay down its $4.8 billion in debt, while divesting breast health would leave it dependent on declining businesses, said Amit Hazan, a New York-based analyst at SunTrust Banks Inc.

“I just don’t see a pathway forward that that could happen without the equity really getting hurt,” Hazan said.

That means a sale of smaller assets within the divisions, such as the company’s breast biopsy business, or a divestiture of its skeletal health unit, may be a better route, Hazan said.

Whatever his plans are, Icahn’s involvement in Hologic is a positive development, said David Katz, chief investment officer at New York-based Matrix Asset Advisors, which oversees about $950 million and began buying Hologic stock at the end of October. He estimates the company could fetch $28 to $32 a share in a sale if there are multiple interested buyers.

“His agenda here is to give the company a greater sense of urgency to maximize shareholder value and one alternative could very well be that they consider selling themselves,” Katz said in a phone interview. “My guess is after Icahn filed his position in the company, a number of investment bankers started sharpening their pencils and really looking at the numbers in detail.”