Covidien Plc plans to acquire ev3 Inc for $2.6 billion to boost its business in stents and other vascular devices, underscoring the favorable deal climate in the medical technology industry.
At $22.50 per share, the deal represents a nearly 19 percent premium for ev3, whose shares had already jumped more than 40 percent this year.
Ev3 specializes in two areas where Covidien sees significant growth over the next five years: neurovascular diseases such as stroke and diseases of vessels outside the heart and brain, known as peripheral vascular diseases.
While vascular devices that combat heart disease get more attention, peripheral artery disease (PAD) is much more prevalent, William Blair & Co analyst Ben Andrew said.
Coronary is ultra-saturated, Andrew said. You have the big boys dominating. PAD is less crowded with players.
The deal stands to presage a huge wave of deals among large medical device players that are cash rich and starved for growth, while many smaller companies have products in attractive areas, said Jason Mills, an analyst with Canaccord Genuity.
You're going to see the most robust M&A cycle in the medical device sector over the next 18 months that you've seen in this industry for over 15 years, Mills said.
Mills named Edwards Lifesciences , Thoratec Corp , HeartWare International , Volcano Corp and ResMed as among the potential targets.
Covidien said it expected the ev3 deal would hurt earnings in the near term, and its shares fell 1.7 percent to $41.68 on the New York Stock Exchange. Ev3 shares jumped 17.5 percent to $22.23 on Nasdaq.
MOVING THE NEEDLE
Covidien/ev3 is the latest mid-size deal in healthcare, including Abbott Laboratories' $3.7 billion deal for the branded generics business of India's Piramal Healthcare and Astellas Pharma's <4503.T> $4 billion acquisition of biotechnology company OSI Pharmaceuticals .
Companies are flush with cash and borrowing rates are favorable, while potential sellers may be more likely to make a deal because valuations have strengthened, said David Heupel, a portfolio manager with Thrivent Investment Management.
Large healthcare companies all seem to have a focus on those $5 billion and sub deals, Heupel said. There's a real interest in buying something that can move the needle, but doesn't really change the whole picture of the company.
On a conference call with analysts, Covidien executives forecast growth of 6 percent to 8 percent over the next five years for the overall $3.1 billion peripheral vascular market, and 10 percent to 12 percent growth over that time for the $1.3 billion neurovascular market.
The purchase of ev3 complements Covidien's $440 million purchase last year of Vnus Medical Technologies, whose devices treat venous reflux disease.
The deal is in line with our strategy of becoming a leading partner with vascular surgeons, neurosurgeons, interventional cardiologists and interventional radiologists, Covidien Chief Executive Officer Richard Meelia said in a press release.
The transaction, announced on Tuesday by the companies in a joint press release, marks the largest acquisition for Covidien since the diversified medical products company was spun off from Tyco International in 2007.
It boosts the medical devices business of Covidien, which also sells medical supplies such as bandages and syringes, and pharmaceuticals like pain medicines.
While the deal premium is modest, ev3's shares had already run up about 18 percent in the last month, Andrew said.
Covidien executives said it was a competitive bidding process for ev3.
Covidien projects the deal, expected to close by the end of July, will hurt profit in 2010 and 2011. It expects the deal to reduce non-GAAP earnings in fiscal 2010 by 5 cents to 8 cents per share and in fiscal 2011 by about 10 cents to 15 cents.
The boards of both companies have unanimously approved the transaction, and certain stockholders affiliated with Warburg, Pincus Equity Partners LP holding about 24 percent of ev3's outstanding common stock have agreed to tender their shares.
Covidien plans to finance the acquisition through a combination of cash on hand, commercial paper and a fully committed bridge facility.
Covidien also said it was selling its sleep therapy product line for an undisclosed amount to privately held PH Invest.
(Reporting by Lewis Krauskopf, additional reporting by Susan Kelly in Chicago; Editing by Lisa Von Ahn, Maureen Bavdek, Dave Zimmerman and Gunna Dickson)