Bloomberg News

Becton Valued Like It’s 1993 Invites Medical Takeovers: Real M&A

November 09, 2011

Nov. 4 (Bloomberg) -- In the busiest year for medical products takeovers, potential acquirers can now scoop up Becton, Dickinson & Co. at the cheapest valuation since 1993.

The company, which sells more than 8,000 medical supplies from syringes to catheters and petri dishes, tumbled by the most in nine months after its profit forecast this week fell short of analysts’ estimates. Franklin Lakes, New Jersey-based Becton sells for 12.4 times projected earnings, 20 percent less than the industry’s average, according to data compiled by Bloomberg.

While Becton’s owners face the prospect of successive profit declines for the first time in at least two decades as funding cuts for medical research and lower spending on health care limit sales, the company may now be cheap enough to entice Johnson & Johnson or private equity firms, Haverford Trust Co. and Edward Jones & Co. said. Buying Becton would give an acquirer a medical-products supplier that is still able to turn a higher proportion of sales into net income than any of its competitors, data compiled by Bloomberg show.

“Becton is an undervalued company with a tremendous franchise,” Hank Smith, chief investment officer at Haverford Trust, said in a telephone interview from Radnor, Pennsylvania. “If Becton gets too much cheaper than this it might very well find itself an acquisition target.”

Smith, whose firm manages about $6.1 billion, including more than 600,000 Becton shares as of June 30, said the company could command more than $90 a share in a takeover. That’s 24 percent higher than its share price yesterday.

Relative Value

Colleen White, a spokeswoman for Becton, said in an e-mail that it doesn’t comment on rumors or speculation.

Becton slipped 0.6 percent to $71.95 at 10:05 a.m. in New York today. The shares have declined every day this week as the company on Nov. 2 forecast earnings from continuing operations of $5.75 a share to $5.85 a share this fiscal year, below the $6.21 average estimate of 19 analysts surveyed by Bloomberg.

They now anticipate that Becton’s full-year net income will decrease by 1.5 percent after dropping 3.5 percent in its fiscal year ended September, the data show. The two-year profit decline would be Becton’s first since at least 1987.

With shares of Becton ending at $72.38 yesterday, the company was valued at 12.4 times its estimated earnings for this fiscal year, data compiled by Bloomberg show. That makes Becton the cheapest in 18 years, versus its own valuation based on reported profit, data compiled by Bloomberg show. Competitors in the medical-products industry traded at 15.5 times on average.

Medical Acquisitions

The discount may attract buyers in the midst of the industry’s biggest year for dealmaking. So far in 2011, there have been 80 announced takeovers of medical-products suppliers valued at $31.2 billion, data compiled by Bloomberg show. That’s already 50 percent more than the amount of acquisitions announced in any other year on record.

Becton makes sense as a takeover target for J&J, according to Haverford Trust, as it moves away from selling drugs. J&J’s revenue from medical devices and diagnostics, which became its largest division two years ago, increased 29 percent in the past five years, while sales at its pharmaceutical unit have stagnated, data compiled by Bloomberg show.

Still, the company is turning to acquisitions to bolster its medical products businesses after more than 50 drug and device recalls since the start of 2010.

In April, J&J announced its acquisition of Synthes Inc., the biggest maker of devices to treat bone fractures and trauma. Once completed, the $19.4 billion transaction, which accounts for the cash and debt that Synthes holds, will be the largest ever for a medical-products company and the biggest purchase in J&J’s 125-year history, the data show.

Patent Protection

Becton, which has boosted sales by 36 percent in the past five years, could also help J&J and other drugmakers cushion the loss of sales to generic competitors as patents for their drugs expire, according to Matt McCormick, a money manager at Cincinnati-based Bahl & Gaynor Inc.

The patent on J&J’s Levaquin, an antibiotic used to treat pneumonia and bronchitis, lapsed this year and opened the door to generics for the treatment that had $1.4 billion in sales in 2010. In the next two years, J&J faces patent expirations on six other drugs that accounted for more than 10 percent of J&J’s total revenue in 2010, data compiled by Bloomberg show.

“What’s big pharma going to do?” McCormick, whose firm oversees $4.1 billion and owned about 500,000 shares of Becton as of June 30, said in a telephone interview. “They’re going to need to find ways to replace those earnings.”

That means “there could be more M&A activity,” he said.

‘Solid Company’

Carol Goodrich, a spokeswoman for New Brunswick, New Jersey-based J&J, said in an e-mail that the company doesn’t comment on rumors or speculation.

Becton, which increased its cash from operations by more than 40 percent from 2005 to 2010, may also entice buyout firms, said Aaron Vaughn, an analyst at Edward Jones in St. Louis.

“It’s a solid company,” he said in a telephone interview. “They do have a good balance sheet. They’re leaders in the markets that they’re in.”

Paul Li, partner and health-care analyst at Brown Advisory Holdings Inc., says one potential pitfall is a slowing U.S. economy, which threatens to hamper sales of medical supplies at Becton as Americans faced with a jobless rate above 9 percent put off hospital visits and check-ups.

“The economy is lousy,” Li, whose firm oversees $24 billion and owned more than 300,000 Becton shares as of June 30, said in a telephone interview from Baltimore. “People are going to the doctor’s office less. That affects their business.”

For the largest health-care and pharmaceutical companies, bidding for Becton may still be worth the risk, according to Peter Lawson, an analyst with Mizuho Securities in New York.

“It’s a well-run company and has very interesting businesses within it that many different acquirers would find attractive,” he said in a telephone interview. “You’re not going to get pushback with buying the best in class.”

--With assistance from Alex Nussbaum and Reg Gale in New York. Editors: Michael Tsang, Daniel Hauck.

To contact the reporter on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net.

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


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