Baxter announced that it is splitting into two standalone companies - a medical products one and the other a biopharmaceuticals business. What are the implications of this?
Following the suit of Covidien and Abbott, Baxter International is also splitting into two businesses, the company announced Thursday. By mid-2015, the company will split into a biopharma company and a medical products company.
The transaction would occur int the form of a ax-free distribution to Baxter shareholders of a new publicly traded stock in the new biopharmaceuticals company.
Here are key highlights of the announcement from a investor presentation:
There are some key takeaways from this announcement, based on a research note by Michael Weinstein, a medtech analyst at JPMorgan Chase, and the investor presentation that Baxter provided following the announcement.
Don’t Believe Everything Management and Boards Say
Weinstein writes that investors had proposed back in early 2013 that Baxter be split into two companies. Company executives had basically beaten that idea down. Thursday’s announcement that the very thing that was formerly proposed is being executed upon is a “strong reversa of management and board’s recent position.l”
Another analyst described the announcement like this:
“We and many investors have always viewed a separation as an attractive prospect - especially after the Gambro acquisition provided scale in Dialysis - but have mostly discounted the idea in the near-term, given management's vocal and public communications seemingly to the contrary,” wrote Danielle Antalffy, a research analyst with healthcare investment bank Leerink Partners LLC, in a research note Thursday.
The Deal Will Be Dilutive
Weinstein pointed out that these deals by their very nature are dilutive to shareholder value even though Baxter said that the deal would have no financial implact on 2014 earnings guidance, and that it would take a one-time charge related to it.
“The Abbott spin of AbbVie was, in retrospect, 15% dilutive with half of the dilution coming on the operating lines and the balance from tax," Weinstein wrote. "Our modeling of the [Baxter] spin assumes at this point 10% dilution for the Bioscience business and 4% for Medical Products, though tax leakage could certainly increase the impact.”
The Medical Products Business Will Grow Slower Than Biopharma Business
From the chart below, it shows that Baxter expects the compound annual growth rate of the medical products business to be slower than that of the biopharma business. Taken as a mean of the CAGRs of four verticals in each company, the medical products business will roughly grow at a 5.5% CAGR compared with the biopharma business that will grow at 12% CAGR between 2012 and 2017.
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