Imaging a Sale of Given
Yesterday, it was reported in an Israeli financial journal that Given Imaging Ltd. (Nasdaq-GIVN) had resumed sale discussions (discontinued earlier this year) with an asking price of $700M-$750M (~$22-$24 per share). Previously, GIVN announced on 10/17/12 that it was "evaluating a range of strategic options", including non-binding preliminary indications of interest. Potential mentioned buyers included two large foreign electronics/images companies and a well-known U.S. pharmaceutical company; GIVN had high price expectations (up to $1B deal value). Three investors are now reported to be interested in the company (two strategic and one financial). Since the initial discussions talks were discontinued, major investor Discount Investment Corp. (XTAE-DISI), which controls 46% GIVN S/O, announced it wants to sell its 46% equity stake to raise capital for its debt restructuring (before a judge in the Tel Aviv court). GIVN closed at $22.63 (11/25/13), up 6.6% on over 5x normal trading volume; the stock hit a yearly high of $22.99 intraday.
We view the probability of a sale as much higher this time around; the likelihood is directly correlated to lowering the sale price range and a clear selling signal from GIVN’s major shareholder. We are normally wary of gossipy deal reporting, especially when it appears focused on ferreting out potential interest for a company considering a sale. However, in this situation, there is some specificity to support a reasonable plausibility that GIVN may be negotiating a transaction (rather than just rhapsodizing about its desire to maximize shareholder value). Another GIVN shareholder, Discovery Group (3.7% S/O and an investor since 2011), would like the company to use its $143M in cash/investments for a $50M buyback. The company is eligible to receive a one-time tax benefit this year from a reduced tax on trapped profits (10% vs. 25%) of $54M; the net amount could be used for a special dividend or a share buyback. In any case, the company has a number of options to distribute cash to shareholders; the reemergence of takeover chatter suggests that is the preferred method.
A strategic buyer should be able to pay the highest price for GIVN. We estimate that 7%-10% savings/synergies (on $213M revenues) added to $43M EBITDA (2014E) at a 10x multiple would imply a $22.70-$24.75/share takeover value (with $1.80-$2.00/share additional value for every EBITDA multiple). A 1.0-1.1 PEG of estimated 25% LT growth rate and $0.94 EPS (2014E) imply a $23.50-$25.85/share takeover value. The average GIVN closing price for the prior two and three months is $19.75 and $18.91, respectively; a $25/share deal value would reflect a ~25%-30% price premium to those average prices. A financial buyer would be stretching at a price of $22-$24/share, even with GIVN option holders rolling over their equity; the average GIVN option strike price was ~$20/share at the end of 2012. While a bidding contest is a possibility, we believe DISI’s need for cash (or at least a deal announcement by the end of 2013) will likely put a cap on GIVN getting a frothy deal price. Absent a transaction, we estimate a $17-$18/share fundamental value for GIVN (~18x-19x P/E multiple).
Like many other Israeli-based companies, GIVN has a strong technology component, which in its case is combined with improving a normally invasive medical procedure. The company’s capsule endoscopy system features a PillCam capsule endoscope (a miniaturized video camera inside a disposable capsule that is naturally ingested by the patient and delivers high quality color video images of the inside of the gastrointestinal tract); the procedure is relatively painless. On the other hand, the GIVN share performance over the past four years has been relatively discomforting; the stock price has peaked over $22 and dropped under $14 three times each. Recently, GIVN announced weak 1Q13 financial performance in early May; the share price traded from $16 to under $14 by mid-June. A July announcement that Japan approved the Pillcam for diagnosing colon diseases helped push the stock back above $16 by mid-August. The stock price has had a steady increase since then, mainly due to potential sale rumors (from DISI wanting to monetize its equity stake), the general strength in U.S.-listed Israeli stocks and an expected 4Q13 clearance by the U.S. FDA of the company’s Pillcam COLON (with sales beginning in 1Q14). Overall, while the first go-around seems to have been focused on an unreachable price expectation, this time around GIVN appears focused on a realistic outcome which should better facilitate a takeover transaction.