Global medical technology companies, Becton, Dickinson and Company BDX and CareFusion Corp finally completed their merger deal on Mar 17, putting an end to the affair that began in Oct 2014. Upon completion of the acquisition, CareFusion became a wholly-owned subsidiary of Becton, Dickinson and will now cease trading on the New York Stock Exchange.
This buyout, which received support from roughly 76% of CareFusion shareholders and all the necessary regulatory go-aheads, seems to hold significant opportunities for the combined entity. In fact, Becton, Dickinson expects the merger to more than double its addressable opportunity by building scale and depth in medication management and patient safety solutions.
However, Moody's Investors Service – the credit rating agency of Moody’s Corporation MCO – does not seem to be too supportive of this union. Following the merger announcement, Moody’s downgraded Becton, Dickinson’s senior unsecured ratings to Baa2 from A3.
The rationale behind this downgrade is the material rise in Becton Dickinson’s leverage as the company has financed the $12.2 billion transaction by incurring nearly $7.7 billion in debt. The debt comprises $6.2 billion in bonds, $1 billion in term loan facility and $500 million in commercial paper, with an average interest rate of 2.6%.
The credit rating agency is apprehensive about Becton, Dickinson’s weakened liquidity profile as well as the company’s increased exposure to U.S. hospital capital equipment environment which is subject to soft sales trends.
However, Moody’s has affirmed a stable rating outlook on the company. The stable outlook incorporates Becton, Dickinson’s deleveraging plans and the view that the integration of CareFusion will go smoothly. Moody's believes that Becton, Dickinson will deleverage from initial debt/EBITDA that is over 4.0 times and will refrain from share buybacks to help support debt reduction.
Nevertheless, if Becton, Dickinson is not able to achieve strategic benefits or does not deleverage as planned and Moody's believes debt/EBITDA will be sustained above 3.0 times, the ratings could likely be downgraded.
Transaction Details
Each outstanding share of CareFusion, par value $0.01 per share, was converted into the right to receive $49.00 in cash and 0.0777 of a share, par value $1.00 per share, of Becton, Dickinson. Upon closing, shareholders of Becton, Dickinson own around 92% of the combined entity while CareFusion shareholders hold around 8%.
Excluding transaction-related expenses relating to the deal closing, Becton, Dickinson expects the acquisition to have an immaterial impact on its second-quarter results of operations, which ends on Mar 31, 2015. It expects the transaction to be accretive to cash earnings per share on a high-teen percentage basis in the first fiscal year. The company expects to update its fiscal 2015 outlook during its second-quarter earnings conference call in May.
Beginning in the second half of fiscal 2015, Becton, Dickinson will report a new Medical segment structure, which will include CareFusion as one of the five reportable business units.
Our Take
Among other synergies to be realized by the united entity, we believe that combining manufacturing footprint and operations and reducing overhead expenses will result in significant cost savings. In our view, the merger also has the potential to enhance the combined entity’s geographical reach and focus intensively on emerging market growth.
However, the strategic benefits behind leveraging Becton Dickinson’s strength in emerging markets are uncertain as it is difficult to determine the extent to which these markets will adopt higher priced capital equipment. Additionally, the U.S. hospital capital equipment environment is also subject to periods of soft sales. Moreover, the company has to gradually de-leverage its balance sheet in order to strengthen its flexibility to respond to changing business and economic conditions.
Given these concerns, it is to be seen whether Becton, Dickinson can successfully execute its strategy to boost sales and realize cost synergies to ultimately justify the price paid in the long run.
Currently, Becton, Dickinson carries a Zacks Rank #3 (Hold). Better-ranked stocks in the medical/dental supply industry include Cardinal Health CAH and Merit Medical MMSI. Both the stocks carry a Zacks Rank #2 (Buy).
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