Making Sense of Abbott’s Sale Of Its Optics Business

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Upside
113
Market
127
Trefis
ABT: Abbott Laboratories logo
ABT
Abbott Laboratories

Abbott (NYSE: ABT) is selling its medical optics division to J&J (NYSE: JNJ), subject to customary approval, in an all cash deal valued at $4.3 billion. According to Abbott, the move is aimed at narrowing the company’s focus and building its leadership position in cardiovascular and diagnostics segments. The medical optics business, acquired in 2009, is reported to have revenues of $1.1 billion. We believe the deal makes both financial and strategic sense. It appears decently priced and it makes strategic sense in that it  narrows down management focus on other important segments.  In addition, it generates cash that can be allocated to paying down debt to be used to finance the pending acquisitions of St. Jude (NYSE: STJ) and Alere (NYSE: ALR).

Our price estimate of $47.50 for Abbott is 13% above the current market price

Is Abbott Getting Decent Price?

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According to our estimates, medical-optics business contributes roughly 5% to Abbott’s revenue and 6% of its valuation.  Given that the company acquired the business in 2009 for $2.8 billion, the company expects to book a gain on the sale.  A deal value of $4.3 billion implies Market Cap-to-Sales ratio for the transaction of 3.9x, which compares favorably with Abbott’s Market Cap-to-Sales ratio of 3.3x, based on current market valuation and our estimated revenues for 2016.

Is There Any Strategic Reason For This Transaction?

Although Abbott’s diversified revenue sources reduce business risk, there is value in focusing on key growth areas considering growing competition and the need for innovation. Abbott is acquiring St. Jude and Alere, subject to regulatory approvals, to position itself strongly in cardiovascular segment and enhance its diagnostic portfolio. It is worth noting that these businesses together contribute nearly 40% to Abbott’s value, as per our estimates. The sale of the smaller optics business will help narrow down the focus of management in the remaining segments.

Would It Help Reduce Debt Burden From Impending Acquisitions?

The transaction of $4.3 billion of medical-optics business is an all cash deal. According to our estimates, the cash available after adjusting for transaction related expenses and tax on the gain resulting from sales of business would be around $3.8 to $4 billion. In a previous article, we estimated that Abbott’s leverage will increase significantly after the acquisitions of St. Jude and Alere. The management plans to achieve Debt-to-EBITDA of 3.5 by 2018. This deal will help the company realize the target sooner.

 

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

Notes:

1) If you like or have any questions about our analysis, please write us back at content@trefis.com. The purpose of these analyses is to help you focus only on a few important things. 
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Abbott Laboratories

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