Updated from 1:34 p.m. ESTBoston Scientific ( BSX) served up a shocker Monday with an unsolicited offer for fellow medical-device maker Guidant ( GDT), trumping a revised bid from rival Johnson & Johnson ( JNJ). The cash and stock offer from Boston Scientific is worth $25 billion, or $72 a share. That's about $3 billion more than a recently revised offer by J&J for Indianapolis-based Guidant. However, it's also about $4 a share less than the original cash and stock offer that J&J
"For shareholders in Guidant, the choice seems to come down to the relative desirability between a greater share price offered by Boston Scientific and the balance between owning Boston Scientific and Johnson & Johnson shares," says Robert M. Goldman of KeyBanc Capital Markets in a Monday research report. Goldman stayed with his hold rating on Boston Scientific. "For Johnson & Johnson, we believe they are in the uncomfortable position of having to increase their offer to Guidant -- after having recently reduced their offer -- or stand the chance of losing Guidant," he says. Goldman doesn't own shares, but Boston Scientific has been a recent investment banking client of his firm. Guidant has been a client for noninvestment banking services, and KeyBanc says it expects to receive or seek compensation for investment-banking services from J&J and Guidant in the next three months.
The deal could be completed by the first quarter of 2006, Tobin says, but Guidant's board must agree to enter into formal negotiations. Shareholders and regulators would also have to approve the merger. "We can get it done, and we can get it done quickly," says Tobin, adding that his company has financing commitments from Bank of America and Merrill Lynch. The deal is would dilute Boston Scientific's earnings per share through 2007, then improve the EPS. But the proposal drew worried comments from Moody's Investors Service which placed five types of Boston Scientific debt, worth $2.5 billion, under review for a possible downgrade. Boston Scientific's senior notes have an A3 rating, an "upper medium grade" designation that's four notches above speculative-grade quality. Moody's review is "based on the belief that even if the transaction is not completed, the announcement signals management's willingness to leverage its balance sheet in a manner inconsistent" with the A3 rating. As a result, Moody's says it may lower the rating "prior to knowing that the transaction will close." If Boston Scientific wins over Guidant, "this acquisition will likely lower credit ratios well below Moody's previous expectations
and could warrant further ratings pressure." Boston Scientific's signature product is the Taxus drug-coated stent, which now accounts for 40% of sales. Drug-coated stents are wire-mesh tubes inserted into arteries to facilitate blood flow after vessel-clogging plaque has been removed. The stent contains a chemical that's released periodically to reduce the rate of reclogging in the arteries. Boston Scientific is the market leader. J&J's Cypher is the other drug-coated stent in the U.S. market. Guidant has been developing its own offering, and it helps J&J market Cypher. Several other device makers are working on drug-coated stents, including Medtronic ( MDT), the market leader in cardiac rhythm management. Medtronic's Endeavor stent was approved for use in the European Union in late July. Other drug-coated stent hopefuls include Abbott ( ABT) and Conor Medsystems.
"The combination of Guidant and Boston Scientific will create the world's leading cardiovascular device company accelerating diversification and growth," Boston Scientific says. "The shareholders of both Guidant and Boston Scientific will benefit from the significant upside potential of the combined company, which will be strongly positioned in a wide range of medical markets and be supported by a more diversified base of revenues and earnings. Boston Scientific's shares are down 23% this year despite a roughly 17% runup since the start of October that has reflected speculation that it was a takeover target. Based on Friday's close of $27.33, they trade at 14.9 times the 2005 Thomson First Call earnings consensus of $1.84 a share and 14.5 times the 2006 consensus of $1.89 a share. The $72-a-share offer is roughly 35.4 times the 2005 Thomson First Call consensus earnings estimate for Guidant of $2.03 a share, although the company has significant balance sheet cash. Shares of several other medical device makers traded actively, most notably St. Jude Medical ( STJ), the third-biggest cardiac rhythm management company behind Medtronic and Guidant. St. Jude periodically appears as a subject of takeover speculation, and Monday was no exception. "Should Johnson & Johnson lose the Guidant franchise, the next likely dance partner is St. Jude," said Wuensch of Harris Nesbitt. St. Jude's stock climbed $2.29, or 4.7%, to $50.56 in heavy trading. Medtronic's stock was up 51 cents, or 0.9%, to $56.29. Abbott was off 37 cents, or 1%, to $38.19.