The Health Care M&A Monthly: $12.8 Billion Deal Unites Thermo Electron and Fisher Scientific

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Mega-deals, among their many attractions, are interesting because of the way they may change the landscape of an industry. By all rights, Thermo Electron Corporation’s (NYSE: TMO) proposed $12.8 billion acquisition of Fisher Scientific International, Inc. (NYSE: FSH) is just such a deal because of how the complementary strengths of the two dovetail to create a powerhouse in the laboratory tools space.
This transaction promises (or threatens, depending on your viewpoint) to create the largest supplier of laboratory products and services to the life science, laboratory and health care industries. By marrying the complementary strengths of the two companies, what emerges is a leader with seamless, end-to-end technology solutions for its customers. Or so the rationale goes.
Fisher Scientific is a provider of consumable products and services to the scientific research and clinical laboratory markets. Its product offerings include over 600,000 products from biochemicals, cell-culture media and RNAi technology to rapid diagnostic tests, safety products and other consumable supplies. Needless to say, the company’s reach is global, serving over 350,000 customers in business, government and academic research worldwide. On a trailing 12-month basis, FSH generated revenue of $5.7 billion, EBITDA of $937 million and net income of $402 million.
Thermo Electron, on the other hand, provides analytical instruments through two divisions. Its Life and Laboratory Sciences segment sells analytic instruments, scientific equipment, services and software solutions for life science, drug discovery and clinical enterprises, among others. Its Measurement and Control segment provides a variety of instruments for use in manufacturing processes and in-the-field applications, including some associated with safety and homeland security. On a trailing 12-month basis, TMO generated revenue of $2.8 billion, EBITDA of $443 million and net income of $196 million.
Reflecting the relative financial resources each brings to the table, the transaction is structured as a reverse merger so that on completion of the deal, FSH shareholders will own 61% of the combined company and TMO shareholders will own the remaining 39%. Marijn Dekkers, president and CEO of TMO, will become CEO of the combined company while Paul Meister, vice chairman of FSH’s board, will become chairman of the board for the combined company.
Under terms of the deal, FSH shareholders are to receive two shares of TMO common stock for each share of FSH common stock they hold. The stock to be issued, based on stock prices the day before the announcement, is worth approximately $10.6 billion. Included in the deal is the assumption of $2.2 billion in debt, bringing the total value of the deal to $12.8 billion.
This transaction is valued at 2.25x revenue and 13.66x EBITDA. Neither figure appears to be excessive in the current M&A market.
On news of the announcement, FSH jumped 10% while TMO fell 2%; this effectively wiped out the 7% premium that TMO’s offer represented over FSH’s prior-day closing price.
At least on the face of it, this deal isn’t about shareholders—and some Fisher shareholders may well wonder what they are getting out of this deal with such a skimpy premium—but about achieving the kind of growth that neither company could easily attain on its own.
The combined company, to be called Thermo Fisher Scientific and based in Waltham, Massachusetts, is expected to generate over $9 billion in revenue and $1 billion in cash flow in 2007. It both accelerates revenue growth and anticipates a 20% compound annual growth rate in adjusted EPS over three years. Finally, as a dollop of cream on these results, it also generates $200 million in synergies.
In a nuts-and-bolts comparison we think captures this deal perfectly, as well as the rationale for undertaking it, an analyst at Robert W. Baird observed, "If you were to use a kitchen analogy, Thermo would be supplying the appliances and Fisher would be the supermarket. Right now in the life sciences tool space, we don’t have anybody that has all this under one roof." Given the entrenchment of the two component companies in their respective spaces, it is unlikely this combination will raise significant antitrust issues. Uniting their complementary strengths "under one roof" will also make life more interesting for such competitors as Beckman Coulter (NYSE: BEC), Abbott Laboratories (NYSE: ABT) and PerkinElmer (NYSE: PKI).
Financial advice is being provided to TMO by Lehman Brothers and Rothschild while FSH is receiving its financial advice from Goldman Sachs and Lazard Freres.
 

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