By Caroline Humer and Bill Berkrot
(Reuters) - Abbott Laboratories (ABT.N) said on Thursday that it would buy St. Jude Medical Inc (STJ.N) in a $25 billion deal to expand its heart device business, but investors worried that the acquisition would not pay off as promised.
Medical equipment makers are under pressure to offer a wider portfolio of products to hospital customers, which have also been through a wave of mergers that have increased their power to negotiate on pricing.
Abbott said its deal would help it compete more effectively against larger rivals Medtronic Plc (MDT.N) and Boston Scientific Corp (BSX.N), but its shares fell nearly 6 percent.
Abbott Chief Executive Officer Miles White defended the deal on a conference call with analysts, saying it would add to earnings per share in the first full year after it closes.
The company said St. Jude's devices to treat heart failure and abnormal heart rhythm complement its own cardiovascular products. White also said on CNBC that while St. Jude has had low-growth years, it has new products to introduce over the next few years.
"St. Jude is in more mature cardiac rhythm management markets, so does this really become additive to the overall Abbott revenue growth rate?” BMO Capital Markets analyst Joanne Wuensch said.
Abbott is also trying to buy diagnostics company Alere Inc (ALR.N) for $5.8 billion and has a plan in place to borrow money for both it and St. Jude. Still, some investors have doubts it will complete the Alere deal because the U.S. government is investigating that company over sales practices.
“Abbott as serial acquirer has built up its medical device division," Morningstar analyst Debbie Wang said. "Once they make those purchases, it does not seem like management is very good at producing meaningful innovation.”
With St. Jude, Abbott could compete better in an environment where hospitals prefer to deal with only two or three vendors, White said.
"Price pressure has been a way of life for a couple of years, so you have to make it up on volume," said Gabelli Funds portfolio manager Jeff Jonas, adding that there is "really no overlap" in the companies' products.
Abbott, which also sells nutritionals such as baby formula, generic pharmaceuticals and diagnostics, said the combined cardiovascular device unit would have annual sales of $8.7 billion.
Shares of St. Jude were up 27.3 percent at $78.10 in midday trading, while Abbott was down 5.6 percent after a sharper drop.
CASH AND STOCK
St. Jude shareholders will receive $46.75 in cash and 0.8708 of an Abbott share for each of their shares. Based on Abbott's closing stock price on Wednesday, the deal is worth $25 billion, or about $85 per share, a 37 percent premium.
The acquisition will add 21 cents per share to earnings, excluding special items, in 2017 and 29 cents in 2018, Abbott said.
Abbott said it would take on or refinance about $5.7 billion of St. Jude's net debt. It sees $500 million in cost savings by 2020.
The move comes after years of speculation about the two medical device companies merging. Bloomberg reported last summer that a deal was under discussion, but Abbott denied it.
Responding to analysts' questions on Thursday, White said the talks did not begin until late last year.
"I don't know that anything has changed," White said. "I've been open about being interested in M&A."
Evercore and Bank of America Merrill Lynch are advising Abbott on the St. Jude deal, while Guggenheim Securities is the financial adviser to St. Jude.
Wachtell, Lipton, Rosen & Katz was legal counsel to Abbott, while Gibson, Dunn & Crutcher advised St. Jude.
(Reporting by Amrutha Penumudi in Bengaluru, and Caroline Humer and Bill Berkrot in New York; Additional reporting by Natalie Grover and Sayantani Ghosh; Editing by Saumyadeb Chakrabarty and Lisa Von Ahn)