Boston Scientific (BSX) - Get Boston Scientific Corporation Report announced it will hang on to its endosurgery group, subjecting itself to another credit downgrade while making an argument for shareholder value.
The company indicated in March that it was exploring the possibility of an initial public offering of a minority interest in the group -- anywhere from 18% to 25%. Bear Stearns analyst Rick Wise noted in a report Friday that such an IPO could have increased the visibility of the non-cardiac business and accelerated debt pay-down -- possibly creating more than $1 billion in proceeds from debt and equity.
"The deal also would have helped highlight Endo's value as
Boston Scientific works through issues such as the
Guidant acquisition debt, FDA warning letters, and cardiac business headwinds," Wise wrote in the report.
Boston Scientific CEO Jim Tobin noted that endosurgery has delivered consistent double-digit growth and is expected to generate more than $1.4 billion in revenue this year.
"We believe we can create more shareholder value with the endosurgery group remaining wholly owned by Boston Scientific, and we have concluded that an IPO would have reduced -- rather than enhanced -- Boston Scientific's shareholder value," Tobin said.
But proceeds to pay down debt were a tantalizing prospect, considering that Moody's and Standard & Poor's had already
lowered their credit ratings for Boston Scientific in light of
"This action reflects the company's disappointing second quarter, and increased concern regarding the company's ability to reduce debt in line with prior expectations," said S&P credit analyst Cheryl Richer in a July 23 report.
Then Friday in round two, S&P and Fitch Ratings both changed their ratings for the company to BB+ from BBB-. Richer noted that the downgrade reflects the company's decision to hang on to whole ownership of the endosurgery group. "Although Boston Scientific still plans to sell nonstrategic assets, divest elements of its investment portfolio and reduce expenses and headcount, debt reduction will proceed at a slower pace than previously anticipated," she wrote.
Some of this debt entered the picture when Boston Scientific bought Guidant for $27 billion in 2006, thus broadening its portfolio to include a cardiac rhythm management (CRM) business -- and tacking on a few legal and regulatory problems due to faulty products.
But despite the lack of proceeds to pay down debt, some think hanging onto the endosurgery unit makes some sense. "Longer-term, retaining endosurgery seems like a good idea to us, given its stable, consistent profitability and growth," noted Wise in the Bear Stearns report.
Sales of Boston Scientific's flagship stents are decelerating. Sales for coronary stent systems, which accounted for about 24% of the company's net sales in the quarter, decreased 28% to $498 million. And in the U.S., drug-eluting stent sales decreased 42% year-over-year to $249 million. These decreases make other initiatives that are experiencing growth, such as endosurgery, all the more important.
"It represents great value, and it provides important balance within our portfolio of businesses. We believe these considerable contributions are best maintained by keeping endosurgery as a strategic asset of Boston Scientific," said Tobin.
Endosurgery sales were a highlight of second-quarter earnings, increasing about 11% to $367 million, from $331 million year-over-year. That accounts for about 18% of the company's net sales for the period.
Still, retaining full control of endosurgery comes at the expense of the company's rating, which is now in junk territory. The company could turn those fortunes around through a number of announcements planned in the coming weeks, regarding selling non-strategic assets, divesting elements of its investment portfolio and reducing expenses and headcount to align with its revenue base.
The company will make shareholders privy to an expense and headcount restructuring plan in particular next quarter.
Shares of Boston Scientific fell 34 cents, or 2.5%, to $13.09 on Friday.