10 May 2016

Abbott to purchase heart devices firm St Jude Medical

In a bid to expand its heart devices business, pharmaceutical giant Abbott last month agreed to acquire New York Stock Exchange (NYSE)-listed St Jude Medical for around USD 30,700 million (inclusive of debt), which will be settled in cash and shares. To finance the deal, the acquiror has obtained a debt facility from the Bank of America.

The offer price is USD 85 per share, which carries a 37 per cent premium over St Jude’s close of USD 62 on 27th April, the last trading day prior to the deal being announced. According to Zephyr, the M&A database published by Bureau van Dijk, the acquisition, which has been approved by the boards of both companies, is set to be Abbott’s largest to date.

Due to healthcare reform, the US medical industry has in recent years seen a wave of consolidation among hospitals. As a result, larger healthcare institutions now wield greater bargaining power with medical device suppliers.  Meanwhile, insurance firms are also reducing payouts for healthcare services, further prompting hospitals to cut costs by sourcing from fewer vendors. With an expanded product portfolio and a larger business scale following the merger, Abbott will gain a better negotiating position and command stronger pricing power in the face of market pressures.

Despite both companies being in the medical equipment business, they are not direct competitors. Abbott provides heart stents, which are complementary to St Jude’s products, which include heart valves and pacemakers.  In support of the takeover, Jonathan Palmer, an analyst at Bloomberg, reckons St Jude is the perfect fit to complement Abbott.

When it comes to medical devices, Abbott still has a limited product range and lacks innovation. St Jude’s extensive product line will thus boost the acquiror’s presence in hospitals, wrote Debbie Wang of Morningstar. Cost-wise, the combined operation will save Abbott and St Jude USD 500 million annually by 2020, according to their joint press release.

Moreover, owning St Jude allows Abbott to further capitalise on future healthcare trends. With an increasing life expectancy and an aging population, particularly in the developed world, demand for medical devices is likely to soar. More importantly, over 40 per cent of adults in the US are likely to suffer from heart diseases by 2030, according to the American Heart Association. Hence, the transaction, though expensive, appears to be a rational move.

Investors, however, think otherwise. Following the announcement of the takeover on 28th April, Abbott’s shares, which are traded on the NYSE, fell 8 per cent to close at USD 40. They closed another 6 per cent lower at USD 38 on 6th May. Shareholders are concerned that the costly acquisition will not pay off, as reported by Reuters.

Michael Weinstein of JP Morgan explained that investors may frown on the deal as it indicates a shift away from Abbott’s strategy to expand its nutritional food business in emerging markets, though he expected the transaction to be well received from a financial standpoint. On the other hand, Brooke Sutherland, a writer at Bloomberg, thinks the USD 3,000 million share consideration (to be issued by Abbott for the purchase of St Jude and to rebalance capital structure), is the main reason for the stock decline.

As stated in the joint press release, Bank of America has also provided debt financing for Abbott’s previously announced acquisition of NYSE-listed Alere (worth around USD 8,400 million), despite the buyer’s request for the transaction to be terminated, which was later rejected by the diagnostic tests manufacturer. Explaining its concern over Alere, the acquiror told Bloomberg: “Abbott is awaiting access to the information it has requested from Alere relating to delays in filing its form 10-K and the circumstances surrounding the criminal grand jury subpoena alleging violations of the Foreign Corrupt Practices Act.

Closing of the St Jude acquisition, which is subject to antitrust regulation, is expected to take place by the end of the year. Commenting on the takeover, Michael Rousseau, chief executive of St Jude, said: “Today's announcement is an exciting next chapter for St Jude Medical, bringing together two industry leaders with a shared passion for innovation, culture and patients."

© Zephyr