Abbott’s Catch 22 With Alere

In February this year, Abbott (NYSE: ABT) announced that it had entered into definitive agreement with Alere (NYSE: ALR) to acquire it for $56 per share, or $5.8 billion. Abbott then had over $6.1 billion  in cash & equivalents after hiving-off its developed pharma business.  In fact, the company has been very active in managing its assets through acquisition and divestiture.  In this article we look into the primary motivation for Abbott to acquire Alere deal, the factors that have held up the deal, and the prospects of its ultimate completion.

Our price estimate of $47.50 for Abbott is about 12% above the current market price

Is There A Business Fit?

Of its annual revenue of over $20 billion, Abbott generates about 22% from its diagnostics business. The business includes immunoassay, clinical chemistry, blood-screening and point-of-care products. The point of care business is relatively small and generates about $470 million in annual revenues. Alere, on the other hand, is a leading point-of-care diagnostic company with about $2.5 billion in sales. It is focused on  cardiometabolic products and services, infectious diseases testing platforms and toxicology solutions. Here follows a breakdown of their revenue.

Furthermore, in terms of products, the strategic fit for Abbott is not only in the diagnostic segment but in the cardio-vascular segment as well. Alere’s cardio-metabolic products are used in by hospitals, clinics and at home to monitor cardiovascular and metabolic data.

What Story Do The Numbers Tell?

If the deal goes through, Abbott would be paying $56 per share in cash. It will cost Abbott close to $8.2 billion including net debt, valuing the deal at Enterprise Value-to-Sales at about 3.2x. While at present Alere is trading at an Enterprise Value-to-Sales ratio of about 2.5x, based on current market capitalization and FY’15 revenue.

Abbott management had claimed it would attain $500 million in cost and revenue synergies by 2019. The EBITDA margin for Abbott’s diagnostic division is about 27% currently. If the estimated synergies are achieved, the EBITDA margin for the combined firm would still not exceed 27%. This leads us to believe that management is not overly ambitious in estimating synergy benefits.

Alere’s revenue has decreased slightly over recent years while Abbott’s diagnostic business sales has improved. The graph below presents the sales over the last three years:

Note: *Annualised  | Abbott’s Diagnostic Segment Revenue 

If All Is Good, What Is The Problem?

Alere has been subject to a number of regulatory and other issues. It was subpoenaed by the U.S. Department of Justice in the inquiry of Foreign Corrupt Practices Act (FCPA) for sales practices related to Africa, Asia and Latin America. Later, it delayed its 10-K filings for the year 2015.  The company had also reported material weakness in its internal controls and had to recall INRatio devices used in blood monitoring.

While all this has been going on, Abbott struck a deal with St. Jude Medical. The deal would cost Abbott close to $30 billion including net debt. In an earlier article we discussed how challenging Abbott’s leverage position would be once both the deals make through. The two impending deals have spooked Abbott’s investors (Read: Why Did Abbott’s Stock Plummet Recently?). The credit rating agencies have also kept Abbott on watch list for potential downgrade if these deals are completed.

Where Is The Deal Headed?

Alere claimed, in its 10-K filings, that Abbott had requested that it terminate the merger in return of payment in the range of $30 – $50 million for Alere’s acquisition related expenses. Later, Alere sued Abbott in Delaware Chancery Court, accusing it of dragging its feet and seeking it to complete the deal. The two companies then agreed for out-of-court mediation. But more recently, according to a Bloomberg News, Alere has reported that mediation has ended without resolution.

Abbott’s stock has taken a hit since the issues related to proposed Alere acquisition started coming out. On the other hand Alere, stock has showed volatile behavior.

Recently, Abbott announced sales of its Medical Optics business to Johnson & Johnson (NYSE: JNJ)  for $4.3 billion in a cash transaction. The news helped soothe investors’ concern. (Read: Making Sense Of Abbott’s Sale Of Its Optics Business). But the announcement set the speculation of increased probability of Alere’s acquisition, as was seen by gain in its share price.

See the links below for more information and analysis about Abbott:

• Leverage to be challenge challenge for Abbott once the deal is done, Part-1
• Leverage to be challenge challenge for Abbott once the deal is done, Part-2
• 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?

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