In its attempt to focus on core profitable segments, Hologic, Inc. HOLX decided to divest its Cynosure medical aesthetics business. Per the announcement, the company entered a definitive agreement with Clayton, Dubilier & Rice to sell the same.
Per the terms of the agreement, roughly 825 employees will be transferred with the Cynosure business, which is expected to close at the end of calendar year 2019. Hologic expects to receive net cash proceeds of $138 million from the divestment, which is subject to certain closing adjustments.
With the impending divestment, the company expects to witness favorable outcomes as Cynosure has been significantly underperforming since its acquisition in March 2017.
Hologic completed the Cynosure acquisition for $66.00 per share in cash, which corresponds to an equity value of $1.65 billion.
Rationale Behind the Agreement
Hologic’s management believes that divesting the medical aesthetics business will enable it to focus more on other core business segments, including Breast Health, which currently accounts for more than 38% of its total revenues.
Meanwhile, the company aims to keep focusing on smaller tuck-in deals, which have been performing well, thereby strengthening its core franchises.
Share Repurchase Plan
Hologic announced that it entered an accelerated share repurchase (ASR) program to buy back $205 million of its common stock. The ASR will be completed, following a new $205-million share repurchase authorization, which has been approved by management. This is an addition to the company’s ongoing share repurchase authorization, under which $211 million is currently available.
Hologic began the divestment process of Cynosure before the end of fiscal 2019 but completed the negotiation after releasing its fiscal fourth-quarter results. Per the company, the transaction is expected to result in significant additional non-cash impairment charges, which will be recorded in its GAAP results for the fourth quarter of fiscal 2019.
Hologic expects additional pre-tax impairment charges of $155-$185 million for the fourth quarter of fiscal 2019 to reduce the carrying value of the asset group to its fair value. Following this, the asset group is expected to meet the desired criteria by the first quarter of fiscal 2020.
However, these adjustments could lead to further expenses. Additionally, the loss from the divestment is expected to generate a cash tax refund of $300 million in calendar year 2022.
In fiscal 2020, the full impact of the divestment and the ASR are expected to be felt in the form of raised earnings per share on both GAAP and non-GAAP basis.
The company’s shares have risen 16.6% in the past year compared with the industry’s growth of 12.4%.
Zacks Rank & Key Picks
Currently, Hologic carries a Zacks Rank #3 (Hold).
Some better-ranked stocks from the broader medical space are Haemonetics Corporation HAE, NuVasive, Inc NUVA and ResMed Inc RMD.
Haemonetics, currently carrying a Zacks Rank #2 (Buy), has a projected long-term earnings growth rate of 13.5%.
NuVasive’s long-term earnings growth rate is estimated at 10.9%. The company currently has a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
ResMed’s long-term earnings growth rate is estimated at 12.9%. It currently carries a Zacks Rank #2.
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