February 26, 2019

Breakingviews: GE-Danaher pharma deal is a win-win remedy

by Breakingviews.

General Electric and Danaher have found a rare prescription – a win-win M&A transaction. Chief Executive Larry Culp is unloading the ailing conglomerate’s biopharmaceutical unit to his old employer for $21 billion. Both sets of investors saw value in the deal, perhaps because the two companies’ goals are different.

GE has struggled to right-size itself since former CEO John Flannery said he was considering a breakup just over a year ago. He sold the group’s locomotive business to Wabtec before being fired in October, and his successor promptly unloaded a chunk of GE’s stake in oil-services firm Baker Hughes. But the group still had $110 billion in debt and huge problems in its power division.

Selling the BioPharma business starts to move the needle. The unit, which sells equipment and software for producing biologic drugs, will bring Culp over $20 billion in cash, which will help slash the group’s $36 billion industrial debt. Standard & Poor’s says there’s a good chance leverage could drop below four times EBITDA by the end of this year. That’s arguably GE’s priority, more than squeezing every last dollar out of Danaher.

That said, the 17 times estimated EBITDA for 2019 that the buyer says it is paying is no bargain-basement price: It is in line with recent deals. Cell-produced treatments such as antibodies and gene therapies are among medicine’s hottest areas, and after this deal Danaher will be one of four firms that dominate the market for equipment and growth media. Danaher says the business’s top line, estimated at $3.2 billion for this year, is growing 7 percent annually. Assume a third of that is profit and allow for $100 million of expected synergies, and by 2022 the investment will be showing an annual post-tax return of around 6 percent – and there could be room for improvement on all those numbers.

Back at GE, the remaining healthcare business, focused around imaging equipment, is valuable, too. It boasts some $17 billion a year in revenue. Rival Siemens Healthineers trades at an enterprise value of about 2.5 times sales, suggesting GE’s unit could be worth some $40 billion in a sale or public flotation, which Culp has promised to pursue. The CEO has bought himself some time for the next dose of turnaround treatment.


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