Leverage To Be A Challenge For Abbott, Once Deals Close: Part 1
Abbott (NYSE: ABT) is about to acquire St. Jude Medical (NYSE: STJ), subject to regulatory approval, at a premium of 37%. The deal is valued at about $25 billion. In enterprise value basis, the transaction is valued at around $30 billion. Meanwhile, Abbott earlier announced the acquisition of Alere (NYSE: ALR), though the deal is progressing slowly. Alere has delayed its annual filing and some speculate that Abbott is less committed to concluding the deal. Alere has filed suit to force closure, but little else has been publicly disclosed. Either way, the deal with Alere is valued at $5.8 billion. Here too, Abbott would be acquiring the debt of Alere, such that the enterprise value of the transaction is about $7.5 billion. In this article, we look at Abbott’s balance sheet and find that the company will be highly levered once these acquisitions have concluded. In a second post, we will discuss how the company may go about deleveraging itself.
Our price estimate of $47.50 for Abbott is 17% above the current market price
Read our analysis: Why is Abbott acquiring St. Jude?
- After Nearly A 20% Rise In Six Months Will Abbott Stock See Higher Levels Post Q1?
- What’s Next For Abbott Stock After A 6% Rise This Year?
- Is Abbott Stock Undervalued At $95?
- Which Is A Better Pick – Abbott Stock Or Amgen?
- Is Abbott Stock A Better Healthcare Pick Over Thermo Fisher Scientific?
- Lower Testing Demand To Weigh On Abbott’s Q2?
Acquisitions Would Strengthen Abbott’s Product Portfolio
With the acquisition of St. Jude Medical Abbott will be positioned either at number 1 or 2 in cardio-vascular segment. The annual sales of the segment would $8.4 billion. It will provide the company with strong product positioning in a market which is estimated at $30 billion. But the delay in product launch in CRM (Cardiac Rhythm Management) category by St. Jude has been a cause of concern for investors.
With Alere’s acquisition, the company has plans to bolster its diagnostic business. While Abbott is a leader in the immuno-assay and blood screening segment, the size of its point-of-care business is relatively small. Alere’s acquisition is expected to bolster this latter business area of Abbott.
While these deals would strengthen Abbott’s product portfolio, they will put strain on the financials of the company.
Abbott Will Have Highly Levered Balance Sheet
The table below shows the level of leverage of Abbott and some its peers:
Abbott has one of the best credit ratings in the industry. However, with the acquisitions completed, its solvency/credit ratios will be impacted significantly. The table below shows the pro-forma calculation of the leverage post-acquisitions:
Needless to say, the credit rating agencies have put Abbott on the watch list with a possible downgrade outlook. While Abbott may no longer be interested in acquiring Alere, the outcome at present is unclear. A ruling ordering Abbott to move ahead with the deal would probably have negative impact on stock price.
See the links below for more information and analysis about Abbott:
- Why is Abbott acquiring St. Jude?
- What’s Abbott’s Fundamental Value Based On Expected 2016 Results?
- What is Abbott’s Revenue And Gross Profit Breakdown?
- How Has Abbott’s Revenue Mix Changed In The Last 5 Years?
Notes:
See More at Trefis | View Interactive Institutional Research (Powered by Trefis)