Global medical technology companies, CareFusion Corporation (CFN) and Becton, Dickinson and Company (BDX) recently announced results of the CareFusion special meeting of stockholders, which was held for the investors to consider and vote on the proposed merger of the two companies.
At the meeting, held on Jan 21, 2015, CareFusion stockholders approved the definitive merger agreement and transaction, with roughly 76% of shares outstanding cast in favor of the proposal. This latest thumbs-up from the company’s shareholders satisfies an important condition to the proposed acquisition.
We note that the merger deal between the companies is making significant progress, and is now expected to close in the first half of 2015. Notably, the waiting period under the HSR Act (Hart-Scott-Rodino Antitrust Improvements Act of 1976), expired on November 19 last year, which satisfies another condition of the deal.
Nonetheless, the proposed acquisition remains subject to certain other conditions and approvals, including approval by the European Commission under the European Union Merger Regulation.
Franklin Lakes, NJ-based Becton, Dickinson and San Diego, CA-based CareFusion had entered into the definitive agreement on Oct 5, 2014. Per the agreement, Becton, Dickinson will acquire CareFusion for roughly $12.2 billion in a stock and cash transaction.
We believe that the deal reflects the companies’ response to cost-related healthcare reforms mandated under the Affordable Care Act, particularly the implementation of the 2.3% annual medical device excise tax.
Effective Jan 2013, the medical device tax has increased the tax burden on the healthcare industry. In fact, CareFusion paid roughly $23 million in medical device taxes in fiscal 2014, and expects the impact of the tax to be around $25 million in fiscal 2015 and annually thereafter.
By combining their complementary product portfolios and technologies, the companies seek to offer a full range of medical products and more cost-effective care. Notably, Becton, Dickinson has already identified $250 million in cost cuts that will come from reducing overhead expenses, combining manufacturing footprint and operations. The savings are expected to be fully realized in fiscal 2018.
The transaction is also anticipated to provide Becton, Dickinson with double-digit earnings growth, on an adjusted basis, in the first full year. Apart from earnings growth, the deal is likely to expand EBITDA margins, and deliver strong cash flow and return on invested capital.
Moreover, the merger between CareFusion and Becton, Dickinson has the potential to enhance the combined entity’s geographical reach and focus intensively on emerging market growth.
Though we expect the proposed merger to generate significant synergies, the companies remain exposed to integration risks. Moreover, the merged entity will continue to face intense competition in each of the markets they operate. Additionally, lower reimbursements for medical products and services could result in pricing pressure and decreased demand for healthcare products, which are added concerns.
Currently, Becton, Dickinson carries a Zacks Rank #3 (Hold).
Better-ranked stocks in the medical products industry include ICU Medical (ICUI) and Cardiovascular Systems (CSII). While ICU Medical sports a Zacks Rank #1 (Strong Buy), Cardiovascular Systems carries a Zacks Rank #2 (Buy).
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