NEW YORK (TheStreet) -- Becton Dickinson (BDX) , which specializes in medical technology, announced Sunday that it was buying CareFusion (CFN) for $12.2 billion. It's a win-win deal for the companies and the consumers who rely on their products. And it's a great deal for shareholders.
CareFusion, which provides products and services to hospitals, is being priced at a 26% premium to its closing price of $46.17 on Oct. 3. (On Monday, the share price leapt 23% as of 3:30 p.m., making up much of that premium.) CareFusion shareholders will receive $49 in cash and 0.0777 of Becton shares for every CareFusion share.
This deal is the latest in an active year for mergers and acquisitions, especially in the medtech and health care sector. So how does the deal compare to others?
Companies with tons of cash but short on growth want instant access to new revenue streams and markets that would have otherwise taken years to build. So Medtronic (MDT) spent $42.9 billion in a deal for Covidien (COV) back in June. In April, Zimmer Holdings (ZMH) picked off orthopedic device maker Biomet for $13 billion.
The current deal is pleasing investors. Shares of both companies are soaring on the news. Becton stock is up more than 7.6% to $124.65; CareFusion is up more than 23% to $56.90.
But more gains are on the way.
Becton shares are likely to reach $140 in the next 12 to 18 months, 13% above current value. Why? The company has now addressed a major need.
While Becton has done well growing both revenue and earnings, its medical segment has been hurt by commoditization. That's because the industry, which has well over 6,500 companies of all sizes, has become highly fragmented, according to government resorting site SelectUSA. CareFusion will help Becton negate this fragmentation and minimize commoditization risks by scaling out its own operations.
Smaller competitors can't compete with Becton in terms of the cost advantages and pricing power it has with hospitals, clinics and pharmacies. With CareFusion coming on board, Becton has even more pricing power, which it will use to grow its margins. Becton believes CareFusion will add "double-digit" earnings-per-share accretion in its first full year.
Prior to this deal, Becton's price-to-earnings ratio of 25 was one point higher than the industry average, according to Yahoo! Finance. That suggests the stock was fairly priced. But with CareFusion coming onboard, Becton just made itself more appealing, especially when compared to cheaper alternatives like Baxter International (BAX) .
The combined company will have a diverse portfolio of products to offer many of their customers. The medical business posted 2013 revenue of $1.12 billion and accounted for 53% of Becton's revenue, while producing 57% of the profits.
Vincent A. Forlenza, Becton's CEO, called CareFusion a "perfect strategic fit." He said the two companies are "coming together to improve medication management, primarily in hospitals.”
But Becton's reach goes beyond that.
Aside from hospitals, Becton's market extends to pharmacies, clinics and governmental health agencies, helping the company deliver revenue and profit growth of 5.3% and 6%, respectively, in 2013. In the most recent quarter, CareFusion posted 24% year-over-year revenue growth, which should impact both revenue and profits at Becton in a positive way.
What's more, Kieran T. Gallahue, CareFusion’s CEO, said the deal would allow the combined company to lower costs and improve patient safety by focusing on unmet needs in hospitals. Big picture: it will help reduce the rising cost of health care in the U.S.
At the time of publication, the author held no position in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
TheStreet Ratings team rates BECTON DICKINSON & CO as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:
"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."
You can view the full analysis from the report here: BDX Ratings Report