April 24, 2017 / 7:30 PM / 3 months ago

Lackluster $24 bln medical merger better than none

3 Min Read

Flu vaccine drips out of a syringe as a nurse prepares for a patient at a clinic in central London November 22, 2005.

NEW YORK (Reuters Breakingviews) - Obamacare lives on. Republican U.S. lawmakers haven't yet repealed the Affordable Care Act, as it's formally known. Healthcare companies have to live with it, too. Becton Dickinson's $24 billion deal to buy C.R. Bard is one result. The expected cost savings fall well short of justifying the 25 percent premium. But scale brings needed negotiating power selling needles and catheters to hospitals.

Healthcare dealmaking has been intense. The $275 billion-plus of announced transactions in 2016, a big number in itself, still pales beside the $447 billion announced in 2015, according to Thomson Reuters data. Obamacare greatly increased the number of Americans covered by health insurance, potentially expanding the market, but associated reforms increased competition for every dollar of revenue between insurers, distributors, hospitals, and medical-technology firms like BD and Bard.

Hospitals have responded by merging and demanding better deals from fewer suppliers. That has pushed suppliers to combine. Last year Abbott agreed to buy St. Jude Medical for $25 billion, and Medtronic bid $43 billion for Covidien in 2014. BD has experience, too, having completed its $12 billion acquisition of CareFusion in March 2015.

BD's quest for scale may be understandable, but it's harder to explain paying nearly 20 times Bard's estimated EBITDA for 2017, using Thomson Reuters data. Annual cost savings are currently pegged at $300 million by 2020. Even assuming those were available immediately their value, taxed at 20 percent and capitalized on a multiple of 10, would only be half the premium on offer.

Executives conceded on a Monday morning call that the return on invested capital would be below 10 percent for the first four years. By Breakingviews back-of-the-envelope calculations, the ROIC, boosted by the deal synergies, will barely reach 6 percent. That may help explain why investors knocked BD's stock down by 4 percent on Monday morning.

The company believes other benefits make the deal worth doing. First, they may develop new products and revenue in areas such as preventing infection. The biggest gain, though, would be in adding volume while minimizing price cuts in sales to ever larger hospital groups. To be fair to BD, it is saving more from its CareFusion acquisition than expected, too. But its latest deal still looks driven more by necessity than choice.

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