NEW YORK (TheStreet) - Shares of both Becton Dickinson(BDX) - Get Report and CareFusion (CFN) surged in premarket trading on Monday after Becton Dickinson said it agreed to acquire the San-Diego-based medical technology company for $12.2 billion.
Becton Dickinson agreed to pay $58 a share in cash and stock for shares of CareFusion, a 26% premium to its closing stock price on Friday of $46.17.
Both companies make medical equipment. They said the combination of their complementary product lines would allow the merged company to offer medical providers integrated systems for preparing and administering medicines. The merger is expected to close in the first half of 2015.
Shares of CareFusion surged 24% to $57.35 before the market opened, while Becton Dickinson's stock rose 7.3% to $124.33.
Here's what analysts are saying on Monday about Becton Dickinson's deal.
Michael Weinstein, JPMorgan (Neutral from Underweight)
Sunday's announced CareFusion acquisition will catch investors by surprise, in our view. Of all the deals speculated over the last few months, BDX buying CFN was not one of them, as (1) it's far larger than anything BD has done or talked about before, and (2) the strategic rationale is far from obvious. As such, we believe most investors will view the acquisition of CFN as a financial transaction - one that turbo charges Becton's earnings growth at the expense of a slower top-line.
On Sunday evening BDX and CFN (MP) announced that BDX will acquire CFN for $12.2B representing the third major MedTech merger within large-cap MedTech this year (along with MDT (MP/COV (MP) & ZMH (OP) /Biomet), and highlighting the importance companies continue to place on increased "scale" in an evolving (post-ACA) healthcare environment. We think the deal will be viewed positively for both CFN (26% premium to Friday's close) and BDX given anticipated double-digit cash EPS accretion as well as the fact that BDX will likely now be switching to cash EPS reporting---i.e. shares now likely to be valued on a higher earnings base.
Margaret Kaczor, William Blair (Market Perform)
The deal is expected to deliver $250 million in pretax cost synergies. Further, the acquisition should be highly accretive to adjusted earnings (double-digit percentage) in its first full year, and GAAP accretive by fiscal year 2018. CareFusion will operate under BD's medical segment ($4.5 billion in revenue in 2014), pushing the revenue base of that segment above $8.5 billion. While an unexpected change from looking for an acquisition target itself, we believe the deal will achieve management's goals to reaccelerate top-line growth and expand its U.S.-leading hospital products internationally. With little product overlap and the same end customer, we believe the deal is likely to go through and will create another healthcare powerhouse.
Kristen Stewart, Deutsche Bank (Hold)
We expect CFN shares to trade sharply higher toward the deal value. We do not anticipate any FTC issues or any other bidders at this price. We believe the deal is likely a long term positive but there are risks as this is the largest deal by far for BDX & CFN is likely to face increasing competition in the infusion pump business in the coming years & from Baxter in particular as it spins off its Biosciences business & becomes more focused on the hospital products business. BDX currently trades at 15.7x our CY15E cash EPS & 14.4x our CY16E EPS, which is fairly in line with our large cap MedTech universe. Applying BDX's expected double-digit accretion to our current EPS estimate, would put the stock around 13x CY16 on a pro forma basis though BDX would have greater leverage due to the deal.
Joanne Wuensch, BMO Capital Markets (Outperform on CareFusion)
Medtech is consolidating, as companies move to a broader product portfolio to address changes in health care delivery (we keep referring to it as creating a buffet table for hospital administrators in assisting in their purchasing decisions). If Zimmer's (ZMH, $102.20, Outperform) purchase of Biomet and Medtronic's (MDT, $62.80, Outperform) purchase of Covidien (COV, $89.17, Market Perform) didn't deliver the message, Becton Dickinson's purchase of CareFusion surely will.
While we believe many investors anticipated that CareFusion would make the next acquisition, its acquisition by BDX does make a lot of sense. Not only does it combine two of the larger hospital supply companies under one roof, the product portfolios are actually quite complementary.
"We rate BECTON DICKINSON & CO (BDX) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its increase in net income, revenue growth, increase in stock price during the past year, expanding profit margins and good cash flow from operations. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and the Health Care Equipment & Supplies industry average. The net income increased by 8.1% when compared to the same quarter one year prior, going from $301.55 million to $326.00 million.
- Despite its growing revenue, the company underperformed as compared with the industry average of 7.9%. Since the same quarter one year prior, revenues slightly increased by 5.1%. Growth in the company's revenue appears to have helped boost the earnings per share.
- The stock has risen over the past year as investors have generally rewarded the company for its earnings growth and other positive factors like the ones we have cited in this report. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
- The gross profit margin for BECTON DICKINSON & CO is rather high; currently it is at 58.00%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 15.11% is above that of the industry average.
- Net operating cash flow has increased to $439.00 million or 11.70% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -19.56%.
- You can view the full analysis from the report here: BDX Ratings Report
-Written by Laurie Kulikowski in New York.
Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.