Print | Share | Reprint

Thermo Fisher pays richly in latest deal

by Thomas Zadvydas | Published April 16, 2013 at 9:21 AM

Analysts are cautiously optimistic about Thermo Fisher Scientific Inc.'s $13.6 billion cash-and-debt deal for Carlsbad, Calif.-based Life Technologies Corp., seeing it as a good expansion for the science and healthcare services acquirer.

But at least one analyst is concerned that Thermo Fisher may have overpaid for Life.

"Thermo Fisher is clearly a stronger company now, and we see qualitative merits for [the deal] going forward. However, returns on invested capital will take another hit because of the rich price paid," wrote Morningstar Inc. equity research analyst Alex Morozov in a note on Monday.

Terms of the deal call for Waltham, Mass.-based Thermo Fisher to pay $76 in cash per share for Life, a premium of about 12% over the target's Friday close. The deal values Life's equity at $11.4 billion, with Thermo Fisher also assuming about $2.2 billion in net debt.

"But we have a tough time justifying the roughly 14 times Ebitda multiple, including assumed debt, for a firm projected to grow at 3% revenue organically, according to Thermo Fisher's internal estimates," wrote Morozov in his note.

But another analyst, who declined to be named, said the 14 times Ebitda was reasonable, saying that Thermo Fisher was being purposefully conservative in its estimates.

"Life will be able to add more breadth and size to [Thermo Fisher's] marketing efforts, which ultimately puts pressure on suppliers," this analyst said.

Life Technologies makes testing equipment used in DNA analysis and blueprinting, generating $3.8 billion in sales in 2012. Life's products are protected by approximately 5,000 patents and licenses. It employs about 10,000 people.

Thermo Fisher said that the acquisition would boost R&D activities. It added it will reap $275 million in operating income synergies from the deal by its third year of ownership.

The buyer detailed aspects of the transaction's financing on a conference call Monday morning. A fully committed bridge facility is already in place. Between $9.5 billion and $10 billion of the package is cash and debt financing and up to $4 billion consists of equity financing.

The package will leave Thermo Fisher with a leverage ratio of between 4.3 times and 4.4 times trailing-twelve-month adjusted Ebitda; its debt will remain investment-grade

Life in January said it was reviewing options after reports appeared saying that several bidders, including private equity firms, had expressed an interest in the company. A private equity consortium of Blackstone Group LP, Carlyle Group, and Kohlberg Kravis Roberts & Co. LP made a joint offer valued at between $63 and $65 per share, according to a report in The Deal last week. Chemicals company Sigma-Aldrich Corp. was also reported to have an interest in Life.

"Private equity was a possibility, but Thermo just couldn't resist this, combining two very similar companies and adding a nice little genetic analysis piece. That's why they made the deal," said Morozov.

The analyst explained that Thermo Fisher eliminates a major competitor for research consumables through this purchase and that it gains a pathway into genetic analysis systems, an area where it lacked presence.

"It was something a lot of folks had been asking them about for years," Morozov said.

Life Technologies stock has had robust performance having risen $27.43, or about 60%, over the past 12 months, a factor in the choice of equity for payment.

"Thermo Fisher shares have been on a tremendous run, so that makes usage of shares as currency a lot more attractive," said Morozov.

Neither company could be reached for further comment on the deal.

Life Technologies has a market value of $12.4 billion, while Thermo Fisher Scientific has a market value of $28.1 billion.

Life Technology shares rose $5.06, or 7.4%, to $73.06, while Thermo Fisher shares fell 75 cents, or 0.94%, to $78.84 Monday afternoon.

-- Lou Whiteman contributed to this report.

Share:

Healthcare

Thermo Fisher pays richly in latest deal

Free preview

Meet the journalists

Thomas Zadvydas

Reporter: Middle Market

Movers & Shakers

Video

Coming back for more

Sectors