M&A Verdict: Danaher Gets Better Side of the Deal Than GE in Life Sciences Unit Sale
Investors and speculators just love a good merger and acquisition story. The story of General Electric Co. (NYSE: GE) selling its Life Sciences biotechnology instrument division to Danaher Corp. (NYSE: DHR
) is one of those fairy tale mergers. There may just be one problem — GE’s Larry Culp, who was already looking at an entire healthcare unit sale (along with other units in GE) may have given the unit away on the cheap.
24/7 Wall St. already covered the news of the merger and the terms. Where things get interesting is that Danaher was worth about $80 billion prior to the merger announcement. But the $21 billion acquisition added almost $7 billion worth of market capitalization to Danaher on the day of the acquisition.
For 2019, Danaher reckons the biopharma business will generate $3.2 billion in annual revenues, a year-over-year increase of about 6.7%. GE Biopharma will operate as a stand-alone company within Danaher’s Life Sciences segment. Other companies in that segment are Pall, Beckman Coulter Life Sciences, SCIEX, Leica Microsystems, Molecular Devices, Phenomenex and IDT.
Before saying that Danaher stole the deal, the metric here is that some speculation had been in the market that unit of GE was worth perhaps $25 billion. And in defense of Culp, who has been touted by many analysts as a great turnaround CEO for GE, GE shares rose by 6.4% to $10.82. So by selling off the unit for $21 billion in capital that will be coming into GE, it also added almost $7 billion in market to end with a $94 billion market value.
The bulk of the deal’s financing will come from Danaher’s available cash and proceeds from the issuance of debt or new credit facilities. Danaher has already commenced concurrent securities offerings of $1.35 billion of shares of common stock and $1.35 billion of shares of Series A Mandatory Convertible Preferred Stock, but these may be allowed to grow with overallotment options. Danaher is using the proceeds from the offerings to fund a portion of the purchase price of its pending acquisition of GE Life Sciences’ biopharma business.
24/7 Wall St. has already seen several analyst research reports regarding the deal. The verdict is not universal that Danaher stole the company, but the reports all had something positive to say about the deal.
Janney adjusted its financial models to reflect accretion and a debt issue, but it raised its rating to Buy from Neutral and raised its fair value estimate (price target) to $136 from $110. According to Janney’s Paul Knight:
As noted in our GE Topic notes late last year, the Life Science assets at General Electric were elite businesses within the Bio-Production and Life Science Markets and worth about $25 billion. Danaher pays $21.5 billion and joins the Bio-Production elites of Thermo Fisher and Sartorius AG. Danaher will now grow organically around 6% instead of 4% and we expect earnings upside as DHR manages the business. We noted previously the value of the GE Life Sciences locked up within their Healthcare division. We also highlighted the potential for Danaher to be an acquirer of the prized GE asset given GE’s need to raise cash.
Janney’s note further said that Danaher seems to have struck a good value with the GE LS acquisition priced 17x EBITDA. Danaher’s purchase price of $21 billion also represents 7x FY19 revenue.
Merrill Lynch has a Buy rating and raised its price objective to $137 from $116 in its call. The firm’s Derik de Bruin sees the bioprocessing firm having at least 6% to 7% annual growth. Danaher was said to be paying roughly $20 billion net of tax benefits, or 17x EBITDA and 6x sales, for the unit with earnings accretion 45 to 50 cents expected in 2020. The firm is positive on the deal as it transforms Danaher’s life sciences business. The report said:
The fact that Danaher was courting GE had been discussed in the press, and so it was not a surprise, although the valuation was less than some had speculated given the unit’s higher organic sales growth and margin (>30% adj. EBITDA) profile. The deal is expected to close in the fourth quarter of 2019 and we see limited regulatory risk.
CFRA (S&P Global) maintained its Hold rating but still raised its target to $130 from $116 on Danaher. The firm’s Kevin Huang believes this reflects strong momentum and his positive view of the news to acquire GE’s biotechnology instrument division for $21 billion in cash. He said:
We think this is a natural fit for Danaher’s existing business, and both eliminates a major competitor in this business and creates a wide moat and gap between DHR and other competitors. However, we think there may be challenges related to integrating this business and the price tag at about 7x sales and 17x forward EBITDA is extremely expensive. DHR has a fantastic track record of buying and integrating businesses, but this is a purchase on a completely different scale. With the shares up sharply in pre-market on the news, we think further upside over the next 12-months may be more muted, and likely in line with the overall market.
Shares of Danaher closed up 8.5% at $123.15 and the company hit a 52-week high of $124.10. It seems likely to expect even more analyst upgrades or at least price targets hikes because its consensus analyst target price ahead of the deal was $115.29.
Sometimes an acquirer sees its stock take a hit lower after announcing an acquisition. After all, assuming any generic merger is not an all-stock deal, the acquirer is usually depleting cash that can be used for dividends or buybacks, they may be taking on debt and adding financial leverage, and there are always some execution and regulatory risks that could interfere with a transaction’s perceived value.
In the case of Danaher and GE, it looks like Danaher may have won when it comes to deciding who got the better side of the deal.