Bloomberg News

Olympus 37% Less Than Medical Unit Seen Luring Bidders: Real M&A

October 20, 2011

Oct. 20 (Bloomberg) -- Olympus Corp. is so battered after ousting its first non-Japanese president that potential acquirers could snap up the entire company for 37 percent less than the value of its medical-equipment business alone.

The Tokyo-based maker of endoscopes and cameras plunged 47 percent, the biggest drop in at least 37 years, since President Michael C. Woodford was fired by the board last week after calling for a probe of company payments made to advisers. The slump left Olympus with a market capitalization of $4.9 billion yesterday, $2.9 billion less than the value of its medical unit, according to data compiled by Bloomberg and BGC Partners Inc.

While Olympus owes more money than 98 percent of Japan’s biggest companies versus common equity and camera revenue tumbled in the past three years, it still sells three times as many endoscopes as all its competitors combined, data compiled by Bloomberg show. Further declines in the stock may now attract bidders from Canon Inc. to Johnson & Johnson, Harris Associates LP and BGC Partners said.

“The endoscope business is the jewel for Olympus,” said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments Ltd. in Tokyo, which manages about $28 billion in assets. “The company is attractive to many companies who want to start or expand their medical-equipment business.”

‘Gastrocamera’

Yoshiaki Yamada, a spokesman for Olympus, declined to comment on whether it has been approached by potential bidders or is considering spinning off its medical devices unit.

Founded in 1919 as a microscope and thermometer business, Olympus produced its first camera in 1936 and its first “gastrocamera,” a predecessor to the modern-day endoscope, in 1950, according to the company’s website.

Worth about $12 billion four years ago, Olympus lost more than $4 billion of its market value in the past five days after Woodford was fired and released a PricewaterhouseCoopers report which said the company may face regulatory and legal scrutiny because of payments made to advisers in the acquisition of Gyrus Group Plc in 2008.

Potential offenses may include false accounting, financial assistance and breaches of duties by the board, according to the Oct. 11 report that Woodford provided to Bloomberg News.

Olympus, which said the report included “assumptions” and “speculation” and is misleading, dismissed the 51-year-old British citizen because he bypassed unit managers to give orders directly to employees and “wouldn’t listen,” according to 70- year-old Chairman Tsuyoshi Kikukawa.

Endoscope Demand

Olympus said yesterday it paid $687 million in fees to advisers for its $2 billion purchase of Gyrus, almost double the 30 billion yen ($391 million) Kikukawa disclosed a day earlier.

“There’s a huge leadership vacuum,” said David Herro, chief investment officer of international equities at Harris, which owns 10.9 million Olympus shares. “There’s a strong possibility that someone might try to take over the company.”

Harris, the seventh largest shareholder in Olympus, has written to the company’s board requesting an independent probe and additional information, according to Herro. The letter was also sent to the chief executive officer of the Tokyo Stock Exchange.

Olympus, valued at 2,482 yen a share before Woodford was fired, ended yesterday at 1,389 yen. The shares fell another 4.9 percent, to 1,321 yen, today.

Relative Value

The swoon is creating an opportunity for companies that may have already been interested in pursuing Olympus for its medical business, according to Yukihiro Goto, a Tokyo-based analyst for Macquarie Group Ltd.

While sales at Olympus’s camera unit have fallen by almost 50 percent in the last five fiscal years, revenue from medical equipment has climbed almost a third in the same span, according to data compiled by Bloomberg.

The medical unit is now Olympus’s biggest business with 75 percent of the global endoscope market. Endoscopes are instruments that doctors use to look inside the body cavity and can help detect diseases such as colorectal cancer.

“Olympus is the company that practically started the endoscope market,” Goto said. “It’s not a market where a user would switch between products just because something is cheaper or just because someone else has a brand power in another product category.”

‘Dysfunctional’

The division, more profitable than any other unit with an operating margin of 19.5 percent, may be worth $7.8 billion, according to Amir Anvarzadeh, Singapore-based manager for Asian equity sales at BGC Partners.

Applying the price-sales ratio of 1.8 times for Hoya Corp., the world’s second-largest endoscope maker, would value Olympus’s medical unit at $8.3 billion, data compiled by Bloomberg show.

A group of five companies that Macquarie’s Goto identifies as “global medical device makers with a focus on endoscope,” including Covidien Plc, Boston Scientific Corp., and Smith & Nephew Plc, trade at a median of 2.01 times sales, according to Bloomberg data. At that valuation the medical equipment business would be worth $9.3 billion.

While there is a chance Olympus will be delisted, “the more likely scenario is for Olympus to be bought out by another firm,” Anvarzadeh wrote in an e-mail to clients yesterday.

Yuuki Sakurai, Tokyo-based president at Fukoku Capital Management, says bidders may be reluctant to approach Olympus because of its dispute with its former president and potential accounting irregularities.

Potential Buyers

“I don’t think anyone dares to touch the company for the moment,” he said. “You cannot invest carelessly in a company where corporate governance seems dysfunctional. Yes, the stock has tumbled, but is it really cheap?”

Any buyer would have to absorb Olympus’s $5.7 billion in net debt. A takeover would then cost at least $10.6 billion, at yesterday’s closing price. That’s equal to about 7 times analysts’ estimates for next year’s earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg.

A deal that values Olympus’s equity at $7.8 billion, or what BGC Partners says the medical-equipment unit is worth, would then amount to 9.1 times Ebitda, the data show.

Still, that’s lower than the 15.4 times multiple that Tokyo-based Hoya agreed to spend on Pentax Corp., another Tokyo- based camera maker that produced endoscopes, in December 2006.

‘Gets Taken Out’

J&J, the world’s second-largest seller of health-care products, General Electric Co., Siemens AG and Canon Inc. may be interested, said Herro, who helps manage about $70 billion in assets from Chicago.

“An asset like this does not come up that often,” Herro said. “People would want to get a hold of this thing.”

Other bidders may include Hoya, which has 14 percent of the endoscope market, Fujifilm Holdings Corp., the third-biggest maker of the medical instruments, and Terumo Corp., which already owns 2.5 percent of Olympus, according to Anvarzadeh.

Representatives for the Japanese companies declined to comment on whether they would consider acquiring Olympus, as did their Tokyo-based counterparts at Siemens and GE. Carol Goodrich, a spokeswoman for New Brunswick, New Jersey-based J&J also declined to comment.

“There’s a business that many people would want,” said Herro. “At some point, this may be the result of what happens here, it gets taken out.”

--With assistance from Alex Nussbaum and Tara Lachapelle in New York and Jason Clenfield in Tokyo. Editors: Mohammed Hadi, Michael Tsang

To contact the reporters on this story: Naoko Fujimura in Tokyo at nfujimura@bloomberg.net; Mariko Yasu in Tokyo at myasu@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Philip Lagerkranser at lagerkranser@bloomberg.net


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