Knowing when to hold ‘em and knowing when to fold ‘em are useful skills in more games than just poker. The bidding war for Guidant Corporation (NYSE: GDT), raging over the past two months, has finally come to an end with Guidant’s board accepting Boston Scientific’s (NYSE: BSX) offer of $80 per share, or a total of $27 billion. Unwilling to match or better its December 2004 offer of $76.00 per share, or $25.4 billion, a figure that it subsequently lowered to $21.5 billion, Johnson & Johnson (NYSE: JNJ) found a way to quit Guidant and walked away with the consolation of a $675 million breakup fee.
Under terms of the revised, final deal, Boston Scientific is committing to pay $42.00 in cash and $38.00 in shares of BSX common stock for each share of Guidant stock. This deal offers GDT shareholders a healthy $9.00, or 12.6% premium, over JNJ’s last-known bid of $71.00 per share. The $27 billion price tag translates into acquisition multiples of 7.3x revenue and 27x EBITDA, a very rich deal indeed when we look at other recent transactions in the Medical Device sector.
This bold $80-per-share offer was meant to present Guidant’s board with an offer it couldn’t refuse and to preclude a more generous counteroffer from JNJ, thereby bringing the bidding war to a definitive halt.
Once this deal closes, a combined Boston-Guidant would trail only Medtronic (NYSE: MDT) and become the second-largest pure-play medical device company in the world, with total revenue of $9.0 billion. The newly combined company will have the number one position in coronary stents and number two position in implantable defibrillators.
They’ve won the war, but can they win the peace? By almost any measure, this is a risky deal for BSX. It is taking on substantial debt for a company its size, possibly jeopardizing its credit rating and dampening profitability until 2009.
Abbott Labs Makes An Assist
With a deal this massive, Boston Scientific faced a number of challenges. One is the antitrust concerns that would be raised over grafting Guidant’s vascular business on to its own. Another is how to finance such a big deal. They decided to kill two birds with one stone, by selling off the GDT vascular intervention and endovascular businesses to Abbott Laboratories (NYSE: ABT) in exchange for a three-pronged financing package.
First, Abbott will pay $4.1 billion, or 4.1x revenue, to buy the Guidant vascular business lines. As part of the terms, ABT has also agreed to pay up to $500 million extra in milestone payments, contingent on the development and regulatory approval of certain vascular technologies in the United States and Japan.
Since this side-deal was predicated on BSX snagging GDT, the transaction is now in effect. This acquisition will ensure ABT a strong market position for such vascular devices as drug-eluting stents.
The second part of the financing package is for Abbott Labs to float Boston Scientific a $900 million interest-bearing loan.
Third, Abbott will acquire approximately 56 million shares of BSX stock—a 4% stake in the company—for about $1.4 billion. The cumulative effect of these component deals (not counting the milestone payments) is to direct $6.4 billion in cash to BSX.
Abbott is willing to pony up this much cash because it too is killing two birds with one stone. It is reinforcing its own stent business with the addition of Guidant’s, while keeping it out of the hands of competitor JNJ.
Johnson & Johnson may still cast about for other deals in the Medical Devices sector so it can diversify and prop up a waning growth rate that is threatened in the near term by competition from generic pharmaceutical competitors. Two possible acquisition candidates noted in the media are cardiovascular device companies: St. Jude Medical (NYSE: STJ) and, more remotely, Edwards Lifesciences Corp. (NYSE: EW).