Cardinal Health Inc. CAH recently announced the formal acceptance of its binding offer to acquire Cordis, a unit of Johnson & Johnson JNJ, for $1.944 billion in cash. The offer, which was made by Cardinal Health on Mar 1, 2015, was accepted after consultations with relevant works councils and trade unions.
Subject to regulatory clearances and other customary closing conditions, the transaction is expected to close in the U.S. and key non-U.S. countries toward the end of 2015.
We note that the acquisition of Cordis is a significant step forward in Cardinal Health’s cardiovascular strategy. The newly acquired business will be integrated into Cardinal Health’s Medical Segment, which reported revenues of $2.8 million in the recently concluded third quarter of 2015.
Notably, Cardinal Health expects the deal to add 20 cents (including 7 cents to 8 cents of interest expense) to fiscal 2017 adjusted EPS and save $100 million in annual costs by the end of fiscal 2018.
Headquartered in Fremont, CA, Cordis is a global company with a growing portfolio of products. While the U.S. is the largest single market, Cordis has a significant international presence in more than 50 countries, including China, Japan, Germany, Italy, France, the U.K. and Brazil. We believe that the buyout of Cordis will expand Cardinal Health’s footprint in the international markets.
Notably, the Cordis acquisition follows a sequence of strategic moves by Cardinal Health in the areas of cardiology, wound management and orthopedics. Over the past five years, the company executed four large acquisitions – AssuraMed (2013), Kinray (2010), Cardinal Health China (2010) and Healthcare Solutions Holding (2010) – which have considerably boosted the company’s offerings in diversified fields.
We believe that the acquisition of Cordis is one of Cardinal Health’s largest deals in recent times and will complement the 2014 takeover of AccessClosure.
However, the acquisition, which is expected to be financed with a combination of $1 billion in new senior unsecured notes and existing cash, will increase leverage in the near term, which is a concern. Long-term obligations (including current portion) totaled $4 billion as of Mar 31, 2015.
Stocks to Consider
Currently, Cardinal Health carries a Zacks Rank #3 (Hold).
Better-ranked stocks in the medical/dental supply industry include AmerisourceBergen Corp ABC and Luxottica Group SpA LUX. Both the stocks carry a Zacks Rank #2 (Buy).
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