Does Danaher's Cepheid Deal Have More Sizzle Than Meets the Eye?
It is not uncommon for an acquirer to see its shares drop on news when it makes an acquisition. Still, when investors see both companies rise on a merger announcement then they automatically assume that there must be some sizzle to that merger. So what happens when a merger might have more sizzle than meets the eye?
Danaher Corp. (NYSE: DHR) is acquiring Cepheid (NASDAQ: CPHD) in a super-premium deal. The price will be at $53.00 per share, making for an enterprise value of $4 billion after the shares gained just over 50%. That is also about 5.5 times the 2017 consensus sales estimate of $710 million. What may matter here is that the merger was projected to close by the end of this year.
While Cepheid shares were up 52% at $52.29 on the news, shares of Danaher were down 2.4% at $79.25 and not on much different trading volume. When you consider that Danaher’s market cap is almost $55 billion, it’s barely that much different from the simple-math dilution investors should expect.
24/7 Wall St. has accessed a research report from Janney, and their view is that there may be much more sizzle than meets the eye here.
Janney’s Paul Knight has Buy rating on Danaher, and sees the fair value at $95.00 per share. His view is that this acquisition of Cepheid is a smart and safe play to leverage Danaher’s distribution network for Cepheid, a move that bring what will be more marketing muscle and global reach. This is even after pointing out the reaction as a “ho-hum deal for investors who like more near-term accretion.”
Knight actually expects that BioProduction will drive near-term organic beats. This also brings the current share price back to a good entry point to add shares. Mr. Knight’s report talked up the likely accretion. He said:
Management has guided to $0.05 Non-GAAP EPS accretion in Year 1 and $0.30 in Year 5. Key assumptions built into their model include LDD organic growth and Gross Margins of 55% or higher. Cepheid had $60m in G&A Expenses in FY15, which represents an area of low hanging fruit… We view current deal guidance as conservative with DHR choosing to re-invest additional synergies into the business.
One view is that Agilent’s Dx business has experienced gross margins in excess of 58% and is currently on a run-rate of 55%. Cepheid is currently doing less than 10% of revenues in high growth markets such as China, Brazil, and India. Danaher, on the other hand, realizes about 30% of revenues from high growth markets.
as far as a better BioProduction thesis, Kight’s report said:
As part of our strategic alliance with N+1 Singer of the UK we hosted management meetings in New York with Abzena CEO, John Burt, last Friday. Abzena is a monoclonal antibody technology expert that provides biopharma services and often attaches small royalties to therapies in development. The company has a minimum of 30% organic growth and cites robust market demand relative to our expectations of 15-20% industry growth. Our monthly “SCRIP Analyzer” has June’s ‘scrip data in the books and YTD growth increased from 39.9% at the end of May to 40.2% at the end of June. This torrid pace compares to 24.3% growth in 2015, +11% in 2014, and +2% in 2013.
One last point made here was that Danaher has a long history of making mergers and acquisitions, while also having a track record of exceeding guidance on its acquisitions. His fair value of $95.00 can be reached by applying a 23.8 times earnings multiple to 2017 non-GAAP earnings of $4.00 per share.
As far as how this stacks up elsewhere, Danaher has a 52-week range of $61.60 to $82.64. The consensus analyst estimate is actually $87.80, and this $95.00 target is a match against the highest analyst price target.
Elsewhere, S&P put Danaher’s corporate credit rating on ‘Watch Negative’ after noting that the deal’s timing may signal a more aggressive financial policy than it had previously baked in for an ‘A’ rating. Moody’s said that the deal doe snot impact its ‘A2’ rating.