Royal Philips, based in Amsterdam, agreed to acquire Volcano, which makes catheter-based imaging and measurement solutions for cardiovascular uses, for $18 a share to boost its image-guided therapy business, according to a release. The deal is expected to close in the first quarter.
Shares of the small cap med-tech group including AtriCure (ATRC) , Endologix (ELGX) , Heartware International (HTWR) , Thoratec (THOR) , Novadaq Technologies (NVDQ) , TriVascular Technologies (TRIV) and Spectranetics (SPNC) , were all rising on speculation of more M&A in the industry, at least one analyst said.
Shares of Volcano jumped 55.2% to $17.83 on volume of more than 85 million, while Volcano's three-month daily trading volume average is around 830,000 shares. Here's what analysts had to say about the deal:
Jason Mills, Canaccord Genuity (Hold, $18 PT)
At 3x EV/sales ($18/share cash), we believe Philips' acquisition of VOLC is a fortuitous exit for VOLC shareholders, thus do not expect other bidders. In fact, we think Philips will complete this deal by early February. Importantly, we believe the read-through to both VOLC's direct competitors (i.e. [Boston Scientific BSX], private IVUS players) and the small-cap cardiovascular comp group is positive. As to the former, we think a marriage between VOLC and Medtronic MDT or Abbott Laboratories ABT would have been more disconcerting to VOLC's direct IVUS competitors, as we think they would have been able to exert far greater pressure on IVUS competition given the sales force synergies MDT/ABT would have had at their disposal. In other words, we think MDT or ABT could have competed much more on price (i.e. IVUS disposables) than Philips will, as the latter will likely keep, if not expand VOLC's direct sales force, thus limiting the financial leverage on the SG&A side. To wit, we estimate Philips may realize only about $40-50M in cost synergies near-term - almost all in G&A. What's more, BSX and other IVUS competitors could have been disadvantaged far more from a MDT/ABT acquisition of VOLC insofar as they could bundle IVUS/FFR disposables with other cath lab disposables (drug-eluting stents, etc). We wouldn't be surprised if BSX and others are giddy about this transaction.
In terms of the read-through to the broader small-cap med-tech group, we think it is positive. The group is trading at 3.2x FTM EV/sales, just a modest premium to VOLC's bid. That said, the median two-year forward revenue CAGR for the group is >10% and the mean GM profile is higher than VOLC. To wit, we expect M&A to pick up in the medtech space, and think several companies offer more growth potential to several potential acquirers - namely ATRC, ELGX, HTWR, THOR, NVDQ, TRIV and SPNC.
Ben Andrew, William Blair (Market Perform)
The overall outlook for percutaneous coronary interventions (PCIs) both domestically and overseas has been grim and will likely remain so for at least the remainder of this year. Competitive pressures have been slightly less intense than assumed, but we expect they will intensify in several key markets and product areas. Volcano saw strong growth in its peripheral therapeutic franchises last quarter, but these make up a small portion of the revenue base today. Volcano's peripheral segment should deliver strong growth through its peripheral IVUS franchise along with acquisitions of Pioneer Plus, Crux, and the Phoenix atherectomy device from Atheromed. The transaction comes following management's repeated emphasis during its third-quarter call on its renewed focus on transitioning from a revenue-growth orientation to a profit orientation. The company planned to achieve profitability on an EBIT basis before the end of 2015. We assume this emphasis on reducing operating expenses remains in place and will likely help Philips reach the earnings accretion target it announced for 2017. Philips management also expects to deliver 20% EBITA margins in its image therapy by 2017.
Philips management believes that Volcano's product portfolio is highly complementary to Philips' offering in live image-guidance solutions and expects revenue synergies of €400 million (roughly $500 million) over a five-year time frame and top-line growth of high single digits for the combined entity by 2017. Due to the purchase price and the increasing competition in the peripheral and coronary imaging markets, we do not expect another bidder for Volcano.
Christopher Pasquale, JPMorgan (Neutral)
Overall, we are not surprised by Volcano's decision to pursue a sale of the company, something which we had sensed management was open to for some time. And while the stock was trading at $18 less than six months ago, we view this as a full price given the ongoing slowdown in Volcano's core end markets and growing competitive pressures. Including net debt of roughly $270M, the Philips offer represents an all-in purchase price of $1.2B, or 3.0x our 2015 revenue forecast. Philips expects the deal to be accretive to earnings by 2017.
Based on our conversations with management this morning, we do not believe that today's announcement was the end result of a formal auction process. However, we still see a low probability of a competing offer emerging. While therapeutic companies such as Medtronic and Abbott have been speculated as potential acquirers in the past, each has actually strengthened ties with one of Volcano's competitors in recent years (MDT with privately held Acist, ABT with St. Jude Medical STJ). Meanwhile, although we believe Volcano will benefit from some cross-selling opportunities under Philips, we don't see the incremental integration opportunities Philips will now enjoy on the imaging side as attractive enough to force one of the other big cath lab companies into a bidding war. Finally, with limited overlap between the two businesses, FTC concerns would appear minimal and we would expect the transaction to close by the middle of 1Q15.
TheStreet Ratings team rates VOLCANO CORP as a Sell with a ratings score of D. TheStreet Ratings Team has this to say about their recommendation:
"We rate VOLCANO CORP (VOLC) a SELL. This is driven by multiple weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its disappointing return on equity, weak operating cash flow, generally disappointing historical performance in the stock itself, generally high debt management risk and feeble growth in its earnings per share."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Health Care Equipment & Supplies industry and the overall market, VOLCANO CORP's return on equity significantly trails that of both the industry average and the S&P 500.
- Net operating cash flow has significantly decreased to -$3.67 million or 148.82% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.
- The debt-to-equity ratio of 1.36 is relatively high when compared with the industry average, suggesting a need for better debt level management. Regardless of the company's weak debt-to-equity ratio, VOLC has managed to keep a strong quick ratio of 2.47, which demonstrates the ability to cover short-term cash needs.
- Looking at the price performance of VOLC's shares over the past 12 months, there is not much good news to report: the stock is down 45.52%, and it has underformed the S&P 500 Index. In addition, the company's earnings per share are lower today than the year-earlier quarter. Naturally, the overall market trend is bound to be a significant factor. However, in one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.
- VOLCANO CORP's earnings per share declined by 6.7% in the most recent quarter compared to the same quarter a year ago. The company has reported a trend of declining earnings per share over the past two years. However, the consensus estimate suggests that this trend should reverse in the coming year. During the past fiscal year, VOLCANO CORP swung to a loss, reporting -$0.63 versus $0.14 in the prior year. This year, the market expects an improvement in earnings (-$0.17 versus -$0.63).
- You can view the full analysis from the report here: VOLC Ratings Report