Baxter International (BAX) recently inked a definitive agreement to take over Gambro AB, a Sweden-based privately-owned renal products company. The full consideration amounts to 26.5 billion SEK or about $4 billion. The deal is expected to close in the first half of 2013 and is subject to regulatory and standard closing conditions.
Gambro is a med tech company engaged in research, production and sale of dialysis offerings. The company is a world-wide supplier of dialysis offerings utilized in continuous renal replacement treatment and hemodialysis. It had revenues of $1.6 billion in 2011.
As per Baxter, this acquisition strengthens the company’s role in the hemodialysis market. With the takeover, Baxter gains an established set of products, which strengthen its existing line of dialysis products.
Baxter is expected to benefit from the acquisition in several ways. It will be better placed to push sales in European markets, where Gambro had a strong presence. Baxter will also be in a stronger position to grow revenues in the rapidly expanding Asian and Latin American markets. Its pipeline has strengthened post acquisition.
Baxter forecasts that the deal will dilute adjusted earnings per share (excluding special items) by 10 to 15 cents for 2013 and be neutral to moderately accretive for 2014. The transaction is expected to be neutral to adjusted earnings per share (excluding special items and anticipated amortization of intangible assets) for 2013 and then turn accretive by 20 cents to 25 cents for 2014.
Following the takeover of Gambro, Baxter expects to grow 5-year sales by 7% to 8% (in constant currency) and increase long-term adjusted earnings per share by about 8% to 10%, and grow both on a compounded yearly basis. There are over 2 million patients worldwide on dialysis-related treatments with increasing numbers on account of the prevalence of hypertension and diabetes.
Baxter will fund the acquisition through a mix of debt and cash from foreign operations. The company plans to maintain its dividend payout proportion of about 40%.
Baxter is one of the largest pure-play med tech companies in the world in terms of sales. The news regarding Baxter still remains somewhat mixed. On the positive side, the company’s focus on life-sustaining products which are not commoditized, partly insulate it from an economic downturn.
The company is able to generate recurring revenues and consistent cash flow, due to its focus on chronic diseases. Among other positive factors, Baxter retains a strong product pipeline with several products in late-stage clinical development.
On the flip side, despite resilience in certain sub-segments, we are concerned about relative stagnation in sales, a slightly somber outlook for hospital spending and tightening of reimbursement.
Improved execution has lifted sentiment somewhat toward Baxter. It is a good bet for value investors willing to wait as fundamentals improve further. Among others, the company competes with Becton, Dickinson and Company (BDX) in certain niches.
We currently have a long-term Neutral recommendation on Baxter. The stock carries a Zacks #3 Rank, which translates into a short-term Hold rating.
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