3M’s Shares Could Cross $200 Next Year Thanks To Acelity Acquisition

by Trefis Team
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3M (NYSE: MMM) recently announced that is has completed the acquisition of Acelity, Inc – the global medical technology company that provides advanced wound care and specialty surgical applications under the Kinetic Concepts (KCI) and Systagenix brands. 3M announced its plans to acquire Acelity from a private equity consortium for a total enterprise value of ~$6.7 billion in May. Notably, 3M acquired Acelity at an EV/EBITDA multiple of 11x which is well below 3M’s estimated FY’19 multiple of 13.6x

Although, this is the most expensive acquisition in 3M’s history, we think the acquisition is a smart move by the company. Trefis quantifies the impact of the Acelity acquisition on 3M’s operating metrics in the scenario-based dashboard How Much Could 3M Be Worth Post Its Acelity Acquisition?  Besides detailing the rationale behind the acquisition, we arrive at the potential upside to 3M’s stock as a direct result of the acquisition.

 

Why Is The Acquisition A Smart Move By 3M?

#1. 3M’s Addition of Acelity could boost 3M’s Healthcare Revenues by $1.65 billion in FY’20

  • With its purchase of Acelity, 3M is clearly aiming to enhance its presence in the specialized med-tech niche.
  • The firm generated approximately $1.5 billion in revenues in 2018. Also, its organic sales figure has expanded 5% for the first nine months of 2019.
  • Acelity and its KCI subsidiaries will be integrated with 3M’s medical solutions business, under the Healthcare segment
  • We assume that the firm will continue to grow at 5% in FY’20 – adding $1.65 billion to 3M’s Healthcare division by the end of FY’20.
  • As a result, 3M’s healthcare revenues could cross $7.5 billion in FY’20

#2. 3M’s Healthcare EBITDA Margin will likely expand by 70 basis points due to anticipated cost benefits

  • Excluding purchase accounting adjustments and anticipated one-time expenses related to the transaction and integration, cost synergies from the acquisition should help the company’s Healthcare EBITDA margin to expand by 70 basis points in FY’20.
  • As a result, we expect the division’s EBITDA margin to reach 34% in FY’20 as opposed to our current forecast of 33.3%.
  • Notably, this translates into an increase in recurring expenses for 3M by $450 million for the year

#3. Additional revenues coupled with anticipated cost synergies are likely to provide benefits of around $0.25 per share

  • Additional revenue of $1.65 billion coupled with the cost savings should provide a boost to the company’s bottom-line.
  • We expect the company’s net income to reach $6.12 billion as opposed to our existing forecast of just shy $6 billion.
  • Assuming shares outstanding of around $585 million, this translates to a benefit of around $0.25 per share

#4. This pushes our price estimate for 3M’s shares above $200

  • In our base case (pre-acquisition) scenario, we estimate a price estimate of $199 for 3M’s Stock. This figure increases to $204 after factoring in the impact of the acquisition.
  • Details about our forecast for 3M’s EPS for FY20 are available in our interactive dashboard.

 

To sum things up, the acquisition of Acelity will unlock sizable value for 3M over coming months. Acelity’s business is growing and 3M has necessary resources at its disposal to make the most of Acelity’s position in the growing wound care industry.

 

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