PerkinElmer Medical Imaging Unit Sale Could Be in the Works

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As investors look for PerkinElmer (PKI) to reaccelerate growth -- perhaps ramping up the scale of its M&A to a level closer to its larger peers -- the life science and tools company is likely looking to offload its underperforming medical imaging business.

The Waltham, Mass.-based medical technology company's CEO, Chairman and President Robert F. Friel hinted on the company's November third-quarter earnings call that it will "prune where appropriate" as it looks to boost growth and profitability.

Friel is probably referring to the medical imaging business that executives have consistently deemed a challenging unit and one that saw a double-digit decline in third-quarter growth. The business makes flat panel detectors that are incorporated into x-ray systems to help doctors evaluate, diagnose and treat medical conditions.

PerkinElmer doesn't disclose the unit's financial figures, but Friel said on a November 2015 conference call that medical imaging accounts for about 8% of its total revenue, depending on the quarter. That would equate to roughly $184 million of its $2.3 billion in 2015 revenue.  

Broadly speaking, flat panel and medical imaging is more of a commodity business, and U.S. players have suffered from unfavorable currency movements, Karen Koski of BTIG said. As result, Japanese and European competitors have been able to achieve lower cost structures, she explained.   

Palo Alto, Calif.-based Varian Medical Systems (VAR) in May unveiled plans to divest its imaging components business through a tax-free distribution to shareholders after years of tossing around such a transaction, Varian CFO Elisha Finney told The Deal at the time. Besides having to weather currency headwinds, the unit's business model -- dependent on a concentrated customer base of original equipment manufacturers -- differed from the remainder of the company, which serves hospitals and clinics. 

The same is true for PerkinElmer's medical imaging unit, whose No. 1 OEM customer is Action Alerts PLUS holding General Electric (GE) , and despite headwinds is a good cash generator that the company has been able to utilize to drive growth within its other businesses, Bryan Brokmeier of Cantor Fitzgerald said.  

"Some companies are very reluctant to sell underperforming assets, but PKI isn't one of them," Brokmeier said. 

Matthew Mishan of KeyBanc Capital Markets added that he wouldn't be surprised to see the unit divested within the next two quarters, though he cautioned that medical imaging is a tougher part of the supply chain and that finding the right buyer could theoretically take time. 

In other words, whether the unit can indicate a return toward growth will be a key factor, company followers said. For instance, the timing of pending the Varian spinoff made sense given the imaging components unit had stabilized and returned to growth mode, The Deal previously reported. Should the PerkinElmer unit continue to decline, a sale to a competitor or another strategic move becomes much more difficult, the analysts noted.

If the company is indeed pursuing the unit's sale, logical buyers might include Trixell, a subsidiary of the Thales Electron Devices unit of French multinational Thales, or the Afga Healthcare business of Belgium's Afga-Gevaert, suggested Brokmeier. Other strategies could encompassing medical imaging units like Tokyo's FujiFilm Holdings and Canon (CAJ) could also make sense, he added. 

Interest is less certain from the Varian spinoff, which will be called Varex Imaging upon the transaction's expected completion by years' end.

"Do they want to own it, so if and when currency shifts they are a bigger player?" Koski said. "On the flip side, do they want to complicate things by having to integrate new products ... My guess is you wouldn't want to pay too much until the spinoff is completed." 

Beyond possible divestitures, which Koski noted could also include the company's ViaCord cord blood business, investors seem to have their sights set on M&A that will really move the needle for PerkinElmer, especially as peers like Thermo Fisher Scientific (TMO) and Danaher (DHR) accelerate growth and strike meaningful transactions. 

Thermo, for its part, closed its $4.4 billion deal for electron microscopy specialist FEI in September, after completing its $1.3 billion purchase of DNA testing company Affymetrix in March. Danaher this year built up its diagnostics business when it bought Cepheid for $4 billion in a deal that closed in November. The one-time real estate investment trust-turned conglomerate completed the spinoff of industrial technology and testing group Fortive earlier in the year.

"You want to see them be a little more aggressive in terms of free cash flow," Mishan said, nothing that they haven't shown a willingness to pay up for life sciences and tools companies like Thermo and Danaher.

For PerkinElmer to really drive operating margin expansion, Brokmeier agreed that it needs to get more involved in M&A. Leverage included, the company pull together about $1 billion in potential capital for a deal. PerkinElmer is likely to look for opportunities in areas where they've been seeing the most growth and have been most focused on, particularly in diagnostics, and potentially in newborn screening, pediatric diagnostics or food safety and testing, he added. 

A PerkinElmer spokesman didn't return a call on Monday. 

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