Thermo Fisher to pay $13.6bn for Life Technologies

Thermo Fisher Scientific Inc. Market Cap(as of 19/04/13) : $28.7 bn

Life Technologies Corp. Market Cap(as of 19/04/13): $12.6 bn

Deal size: $13.6bn

On April 15^th , Thermo Fisher Scientific, the second-biggest maker of life sciences equipment by market value, agreed to buy for $13.6bn  Life Technologies Corporation, a California based manufacturer of  laboratory equipment that helps to blueprint DNA.

Back in January it was reported that Life Technologies Corporation was exploring a strategic review aimed to sell itself. Interestingly, Life received two different offers: the first one coming from a strategic buyer, Thermo Fisher, and the second one from a consortium of private equity firms (Blackstone, Carlyle, KKR and Singapore’s Temasek). In particular, the joint bid by a consortium of three rival private equity firms is really unusual and may underline the pressure towards  private equity funds to put their unused capital to work.

The definitive agreement to acquire Life Technologies for around a reported  $13.6 bn includes also the assumption of the debt for $2.2 bn as at the end of 2012. Overall, the company expects the split to be cash and debt of $9.5 to $10.0 billion and equity of up to $4.0 billion. Thermo Fisher  is offering $76 per share, representing a premium of around 42% over Life Technologies’ closing share price of $53.64 on January 16th, the last trading day before it stated that it was reviewing strategic alternatives, and a premium of 11.8% over the closing share price of $68 on the trading day before the announcement.

It is interesting to compare Thermo Fisher’s offer with the price of $65 per share offered by the Private Equity consortium. The difference is about $2 bn in value. Thermo Fisher expects annual cost synergies of about $250 million which, in present value terms after tax at a 20 percent rate are worth about the same as the value gap between the two bids. Moreover, the acquisition of Life Technologies is expected to enhance Thermo Fisher’s technological innovation and expansion in emerging markets and, despite an offering price higher than expected by experts, investors cheered the deal, sending Thermo Fisher stock up by almost 3% by midday in New York. Adding Life Technologies will give Thermo Fisher a dominant position in the life sciences business as well, giving it products in the fields of genetic testing and research. Moreover, according to a UnitedHealth Group report the market for gene tests may grow five-fold to $25bn from $5bn within a decade as more doctors use a patient’s genetic make-up to tailor treatment.

Some concerns about the deal have been expressed by rating agencies. In fact, after the deal announcement, Moody’s Investors Service and Fitch Ratings placed their credit ratings on Thermo Fisher on review for a potential downgrade. According to Moody’s the purchase will more than double Thermo Fisher’s debt and significantly increase its financial leverage, although the combined company will have considerable scale, diversity and cash-generation capabilities that are supportive of an investment-grade rating. Moody’s expects to downgrade the rating by two notches if the acquisition closes as proposed, while Fitch said a one- or two-step downgrade is most likely. Fitch said that Thermo Fisher’s current rating can tolerate increased debt to fund acquisitions, as long as the company is willing and able to reduce debt within the 18 months following the transaction.

JPMorgan and Barclays advised Thermo Fisher and provided it with bridge financing as well. Deutsche Bank and Moelis advised Life Technologies.