Image Source: Iqbal Osman
By Kris Rosemann
Thursday, April 28, was marked by a surge of M&A activity, as major corporations continue to search for growth as global economic concerns remain and the US economy shows signs of slowing. The world’s largest economy, which is accustomed to slow starts to the year, saw seasonally-adjusted GDP grow at a 0.5% rate in the first quarter of 2016, the slowest rate for the first quarter since 2014.
Though a rebound in GDP growth in the second quarter has followed in nearly every year since the Great Recession, a variety of global pressures has caused US GDP growth to slow on a quarter-over-quarter basis since the second quarter of 2015 when it nearly reached 4%, causing some to be overly cautious on the outlook for the remainder of 2016. Consumer spending accounts for over two thirds of GDP and has been on a downward trajectory for the past three quarters, but within that category, spending on services such as health care grew nearly 3%.
A number of recent deals reflect the view of entities looking to take advantage of that uptick in health care spending. In the largest of the lot, Abbott Laboratories (ABT) agreed to purchase St. Jude Medical (STJ) for ~$85 per share in cash and stock, amounting to a total consideration of ~$25 billion. The move by Abbott is aimed at expanding its heart device business to compete with larger rivals such as Dividend Growth Newsletter holding Medtronic (MDT). The fact that there is a push from hospitals to work with fewer companies to simplify operations was another key consideration in the deal, and the acquisition of St. Jude’s portfolio of products will allow Abbott to deepen its cardiovascular share, where growth is expected to continue. In the US alone, 40% or more of adults are expected to have at least one form of cardiovascular disease by 2030. We continue to like Medtronic and are not viewing the deal as tragic to our thesis on holding the equity as a strong dividend payer, “Medtronic Expects to Generate $40 Billion in Free Cash Flow in Next 5 Years (March 2016)”.
Abbott’s cardiovascular device business is expected to have annual sales of ~$8.7 billion after the consolidation, and the deal is expected to be accretive to earnings in the first full year after closing. Annual pre-tax synergies of $500 million are expected by 2020, including sales and operational benefits. While we are not particularly fond of the amount of debt Abbott will be taking on, which could be nearly $20 billion when all is said and done, the firm’s free cash flow generation should benefit materially from annual synergies resulting from the deal, which is expected to close in the fourth quarter of 2016. The agreement with St. Jude, however, reminded investors of concerns with Abbott’s other recent agreement, a February deal with Alere (ALR) for $5.8 billion that may be headed south as the US government continues to investigate its sales practices. The Alere deal was one made in the same light as the St. Jude acquisition, as it would have positioned Abbott to become a leader in point-of-care diagnostic market.
This flurry of purchases from Abbott comes just a few short years after the company spun off AbbVie (ABBV), which has been making plenty of M&A headlines of its own recently. The pharma giant announced April 28 it agreed to purchase private cancer drug developer Stemcentrx for $5.8 billion, as AbbVie continues to diversify and expand its oncology pipeline. The company will pay $2 billion in cash and issue $3.8 billion in stock, and the deal also carries with it regulatory and clinical milestones that could result in Stemcentrx investors receiving an addition $4 billion in cash down the road.
AbbVie continues to address its future growth needs as biosimilars are set to emerge and provide competition for its leading drug Humira, which accounted for more than 60% of its sales in 2015. As a result, the company has tabbed its oncology portfolio as a major part in its plan to eventually replace those sales over the long term. Last year, the firm acquired blood cancer treatment Imbruvica, for which it has high hopes, in its $21 billion purchase of Pharmacyclics, and the acquisition of Stemcentrx is expected to bolster AbbVie’s late-stage oncology offerings and de-risk its overall pipeline. The key drug in the acquisition is Rova-T, a late-stage compound for small cell lung cancer treatment. The deal is expected to close in the second quarter of 2016, and AbbVie expects it to be dilutive to earnings per share in the year with accretion beginning in 2020. The company has reduced its 2016 adjusted diluted earnings per share target to $4.62-$4.82 from previous guidance of $4.82-$5.02.
In other M&A news in the pharmaceutical world, French drugmaker Sanofi (SNY) has made public its $9.3 billion offer for Medivation (MDVN), a serious disease treatment focused firm. Medivation has been reported to be working with JP Morgan to handle takeover interest, but has no immediate plans to put itself up for sale, which could lead to a lengthy takeover battle between the two. Sanofi is looking to bolster is portfolio as a result of declines in one of its primary drugs and will likely continue to pursue Medivation for access to its only marketed drug Xtandi, a treatment for prostate cancer, in addition to multiple experimental cancer drugs in its pipeline on which clinical trials are currently being conducted. Oncology has become one of the hottest areas of pharma research, and Sanofi has not had much success in developing modern cancer treatments despite its long history in chemotherapy.
M&A activity has been present away from the health care scene as well. Specifically, Comcast’s (CMCSA) NBCUniversal agreed to buy DreamWorks Animation (DWA) for $3.8 billion in cash, or ~$41 per share. The acquisition is aimed at helping build NBCUniversal’s presence in the family and animation space through its film, television, theme park, and consumer products businesses. DreamWorks’ best known franchises in this area include Shrek and Kung Fu Panda, and members of the DreamWorks Classics library, including Where’s Waldo and Rudolph the Red-Nosed Reindeer, will also bolster NBCUniversal’s child-focused portfolio of products. The deal is expected to close by the end of 2016. Many are now speculating that Lions Gate (LGF) could be next in line as a target. Liberty Media (LBTYA), Discovery Communications (DISCA) and Starz (STRZA) could all be potential suitors.
The dawn of May also brought news that Canada’s largest communications company BCE (BCE) would be scooping up Manitoba Telecom Services (MOBAF) in a ~C$3.9 billion deal to continue its sovereign dominance, even as it plans to divest some of Manitoba’s postpaid wireless subscribers to Telus (TU) following the transaction. BCE plans to invest $1 billion over a 5-year period to expand broadband throughout the wireless and wireline networks in Manitoba, bolstering service quality and access. The company expects the deal to be free cash flow accretive, but the incremental spending will offer some headwinds to the measure in the near term. Though we tend to be more conservative when it comes to capital-intensive telecom equities, BCE is worth looking into for those seeking Canadian dividend growth exposure – the company’s dividend history can be accessed here. The deal with Manitoba is expected to close at the end of 2016 or early 2017.