Introduction

Abbott agreed on Thursday, May 5th, to acquire St. Jude Medical in a cash and stock offer for c. $25bn. By combining, Abbott and St. Jude Medical will capture a larger position across the market for cardiovascular devices.

This was the largest in a flurry of health-care deals announced last week including Sanofi’s $9.3bn bid for Medivation and AbbVie’s $5.8bn acquisition of Stemcentrx. The deal shows Abbott’s appetite for acquisitions after agreeing to acquire Alere about three months ago for $5.8 billion.

Despite a crackdown on tax inversions that drove a number of large deals in recent years, health-care remains an engine of M&A activity. Fueled by industry fundamentals, health-care companies have announced $121.12bn in global deal activity this year, second only to the technology industry’s $145.78bn according to Dealogic.

About St. Jude Medical

St. Jude Medical, Inc. is a global medical device company headquartered in Little Canada, Minnesota (U.S).

It was founded in 1976 and went public in 1977. The company is led by Michael T. Rousseau who serves as President and CEO. St. Jude Medical has been listed in the Fortune 500 every year since 2010.

The company has more than 20 principal operations and manufacturing facilities worldwide with products sold in more than 100 countries. The graphs bellow report St. Jude Medical sales per line of business as well as the company’s salesper geography. Its major markets include the United States, Europe, Latin America and Asia-Pacific.

graph 1

Source: company’s annual report

The company reported Net Sales for $5.54bn last year (5.62bn in 2014) as well as Operating Profit for $1.03bn ($1.15 in 2015). Diluted EPS were $3.07 down from $3.46 in 2014.

About Abbott Laboratories

Abbott Laboratories is a multinational health-care company. Founded in 1888 and headquartered in Lake Bluff, Illinois (U.S), it operates in more than 150 countries. The firm is led by Miles D. White, Chairman and CEO.

In 2011, the Abbott announced a spin-off that divided the company into two entities. One focused on medical products and the other on research-based pharmaceuticals. The medical products company retained the Abbott name whereas the research-based pharmaceuticals company was named AbbVie. AbbVie was officially listed on the New York Stock Exchange on January 2, 2013.

Abbott’s core businesses focus on pharmaceuticals, medical devices and nutritional products, which have been supplemented through acquisitions. The firm’s main business lines are:

  • Diagnostics: which accounts for 23% of revenues.
  • Established Pharmaceutical Products: which accounts for 18% of revenues.
  • Nutrition:which accounts for 34% of revenues.
  • Medical devices: which accounts for 25% of revenues.

The company’s major markets in terms of revenues are the U.S (31%), Western Europe (12%), China (9%), India (5%) and Japan (4%).

Abbott reported sales for $20.4bn in 2015 ($20.2bn in 2014) and Operating Income of $2.9bn in 2015 ($2.6bn in 2014).

Industry overview

The global cardiovascular device market has exceeded $50bn in 2015, with the largest regional market share in the US – 45%. Since more people are expected to be diagnosed with cardiovascular diseases in the near future, according to estimates the market will grow at 6.1% CAGR from 2015 to 2017. The growth is additionally enhanced by aging population trend.

The largest segments of the market are cardiac rhythm management, prosthetic devices, interventional cardio products and monitoring & diagnostics.

The key global players are Abbott Laboratories, Biotronik, Boston Scientific, Edwards Lifesciences, Medtronic, Sorin Group and St Jude Medical. Besides big players, a lot of small medical device companies operate in the market.

Picture2

Source: visiongain

Picture3

Source: company’s annual reports

Deal Structure

Through Abbott’s cash-and-stock offer, St. Jude’s shareholders will receive approximately $85 per share – $46.75 in cash and 0.8708 shares of Abbott common stock (whose 5-day weighted average to the day of the announcement was $43.93) for each of their shares. This leads a total transaction equity value of $25bn. Since Abbott will either assume or refinance St. Jude Medical’s $5.7bn net debt, the total deal value tops $30bn.

Taking advantage of the low rates environment, the cash portion of the transaction will be funded with medium and long-term debt. Bank of America Merrill Lynch has already agreed to finance in full this cash portion. Furthermore, In order to rebalance its capital structure, Abbott plans to issue $3bn of common stocks in the secondary market.

The company has also declared its goal to maintain an investment grade credit rating for the combined entity and, following the closing of the transaction, it will implement a de-leveraging plan in order to achieve a debt-to-EBITDA ratio of 3.5 in 2018. As part of this plan, Abbott will reduce its share repurchase activity, moderate the pace of growth of its dividends and M&A activity.

The transaction, which is expected to close in Q4 2016, has been endorsed by the board of directors of St. Jude but still requires the approval of regulators and St. Jude’s shareholders.

 

Price analysis

The price offered ($85 per share) represents a 37% premium with respect to St. Jude Medical’s closing stock price on the last trading day before announcement. The terms of the deal value St. Jude Medical’s EV at 5.3x Revenues and 20.1x EBITDA.

Below are the multiples for some of the closest transactions we found.

Picture4

It should be noted that the timing and size of the acquisition make Abbott’s takeover quite different from any other previous transaction. Nonetheless, looking at the average multiples for these deals, the price paid seems at least reasonable.

Despite attractive multiples and synergies, a 37% premium is definitely a hefty one for a transaction of this size. Furthermore, the markets did not seem to share Abbott’s optimism as the company’s stock price fell in the past week (see below).

Deal rationale

The combination of Abbott Laboratories and St Jude will improve their strategic and competitive positions in cardiovascular market, including atrial fibrillation, heart failure and neuromodulation market. The product portfolio of the companies are rather complementary – St Jude has strong positions in heart failure devices, atrial fibrillation and cardiac rhythm management, while Abbott has leading positions in coronary intervention and trans-catheter mitral repair. Together, the company will be present in nearly every area of the cardiovascular market and will hold a leading position in the sector. Annual sales of the combined company are estimated to reach $8.7bn.

In addition, the strong position of St Jude around the globe will further improve Abbott’s geographical scope, capabilities and infrastructure. The combined entity will have a strong pipeline of new medical device products. According to Abbott’s statement, together the two companies “will be able to better provide what healthcare customers are seeking: the broadest portfolios of innovative products to help them better care for patients and become more effective and efficient.”

The combination is anticipated to result in annual pre-tax synergies of $500 million by 2020, including both sales and operational benefits.

Market Reaction:

On the day of the announcement, Abbott shares declined by 7.8% and in the following week they fell by as much as 13.1%. St. Jude Medical shares, on the other hand, experienced an appreciation of 25.5%, jumping from $61.95 to $77.79 at the close of trading day on April 28, 2016.

Advisors

Abbot was advised by Evercore and Bank of America which also provides the financing for the transaction. Guggenheim Securities served as the financial adviser to St. Jude Medical.

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