Baxter to acquire US medical equipment group Hillrom for $12.4bn
Dealmaking in medical devices sector has been particularly active this year
Baxter International, the medical technology group, has agreed to buy rival equipment company Hillrom for $12.4bn, including debt, the latest in a series of megadeals in the medical devices and healthcare industry.
Hillrom shareholders will receive $156 a share in cash, a 26 per cent premium to the company’s closing stock price on July 27, when Bloomberg News first reported that an initial takeover approach from Baxter had been rebuffed.
The Chicago-based company had originally rejected a $144 a share offer from earlier this year, said a person briefed about the matter.
Healthcare and pharmaceutical mergers and acquisitions have more than doubled in 2021 compared with a year ago, when the sector was badly hit by the effects of the pandemic. Since the start of the year, about $570bn worth of deals have been agreed, according to data compiled by Refinitiv.
M&A in the medical devices sector has been particularly active this year, with a consortium of private equity groups led by Blackstone, Carlyle and Hellman & Friedman buying a majority stake in Medline for about $34bn, including debt.
Dealmaking in the sector has sped up over the past few years, including Abbott’s $25bn takeover of St Jude and Medtronic’s $42.9bn acquisition of Covidien, as companies seek to build scale as industry margins become thinner.
Overall M&A activity, across sectors, has also been booming since the start of the year, with nearly $4tn worth of transactions agreed so far, an all-time record and more than double the total for all of 2020.
Companies that were forced to drop deal plans last year due to coronavirus have rushed back to the M&A table in recent months, partly because many chief executives are concerned about a possible future rise in interest rates.
Borrowing costs currently are at historic lows, which makes financing transactions cheaper than usual.
Baxter said on Thursday that it would finance the transaction through a combination of cash and debt financing from JPMorgan Chase and Citibank. The Deerfield, Illinois-based company will have net leverage of approximately 4.2 times earnings before interest, taxes, depreciation and amortisation of the combined companies.
The combination of Hillrom, which makes healthcare equipment varying from low-tech hospital chairs to more sophisticated wearable electrocardiographs and operating tables, and Baxter, which focuses on critical care, nutrition and surgical products, could generate $250m of annual pre-tax cost synergies by 2024.
Bill Gross lashes out at ‘garbage’ government bonds
Not the first time ‘bond king’ Gross has called time on the four-decade bull market
Bonds are “trash” and buying US government debt is all but certain to be a losing bet, legendary former bond investor Bill Gross has said.
Gross, the erstwhile “bond king” who built Pimco into a $2tn asset manager before his departure in 2014, fired the latest salvo against the asset class that made him famous in a rambling investment outlook posted on his personal website.
US Treasury yields have slumped in recent months, reflecting a powerful global rally in global debt prices that has blindsided many big investors. On Thursday the 10-year Treasury yield — a benchmark for financial assets around the world — was just 1.29 per cent, far below its late-March peak of 1.75 per cent.
At today’s levels, yields have “nowhere to go but up” given the Federal Reserve is soon expected to start winding down its bond-buying programme, wrote Gross. The 77-year-old, who retired from professional fund management two years ago, said he expected the 10-year Treasury yield to rise to 2 per cent over the next 12 months, resulting in a loss of about 3 per cent for investors.
“With quantitative easing about to reverse, it’s more than obvious that the $120bn-a-month Federal Reserve deluge will probably end sometime in mid-2022 given inflation at greater than 2 per cent and economic growth prospects remaining optimistic,” he wrote, adding that the central bank has bought 60 per cent of net issuance by the US government over the past year. “How willing, therefore, will private markets be to absorb this future 60 per cent in mid-2022 and beyond?”
He added: “Cash has been trash for a long time but there are now new contenders for the investment garbage can. Intermediate to long-term bond funds are in that trash receptacle for sure.”
After founding Pimco in 1971, Gross revolutionised bond investing as he built the company into the world’s largest fixed-income asset manager. He later became known for his wide-ranging, often eccentric commentaries on markets. His latest missive is no exception, touching on non-fungible tokens, the gymnast Simone Biles and a 2018 “dust-up” with a neighbour in which he blasted the theme tune from Gilligan’s Island over the fence of his California beachside mansion.
This week’s note is not the first time Gross has attempted to call time on the four-decade bull market in bonds. In March he said he was shorting Treasuries, expecting yields to climb to 3 per cent. He also revealed he was betting against government bonds in early 2018 while working for Janus Henderson, the company he joined after abruptly quitting Pimco in 2014
Still, Gross is far from the only investor to be caught out by this summer’s Treasury rally. Many heavyweight bond investors stuck with their bearish bets even as yields plunged in July, a move which led to big losses for some high-profile hedge funds that had piled into the so-called reflation trade.
Gapping up
In reaction to earnings/guidance:
- CHPT +12.2%, NCNO +10.3% (also selected by Wells Fargo to enhance commercial bank lending), ASAN +10.2% (also names new COO), NTNX +7.1%, SMTC +7.1%, CIEN +6.8%, SIG +6.4%, GCO +5%, GEF +4.2%, DOOO +2.2%, GIII +1.6%
Other news:
- TLSA +16.4% (Tiziana Life Sciences and Precision BioSciences sign exclusive license agreement to evaluate Foralumab)
- INMB +8.5% (reports Alzheimer's patients treated with XPro show reduction in CSF Phospho-Tau and evidence of remyelination)
- HUT +6.7% (August bitcoin mined of 326, total bitcoin balance in reserve: 4,450 as of Aug. 31)
- HRC +3.1% (Baxter (BAX) confirms plans to acquire Hillrom in transaction valued at $156.00 per Hillrom Share for an All-Cash Purchase Price of $10.5 Billion)
- MNSO +2.2% (ramps up expansion in europe, opens new stores in Spain, UK and Italy)
- AEM +1.7% (announces investment in Candelaria Mining)
- ACAD +1.5% (CFO departs)
- QDEL +1.3% (to make QuickVue At-Home OTC COVID-19 tests available at CVS)
- XRX +1.3% (announced the formation of CareAR)
- MRNA +1.2% (initiates submission of initial data to the FDA for COVID-19 vaccine booster)
- GNPK +1.2% (Shareholders approve business combination with Redwire)
- DTIL +0.9% (Tiziana Life Sciences and Precision BioSciences sign exclusive license agreement to evaluate Foralumab)
Alibaba Pledges $15.5 Billion as Chinese Companies Extol Beijing’s Common Prosperity Push
Tencent and others also rush to support government’s initiative
Alibaba Group Holding Ltd. BABA 3.77% vowed to spend the equivalent of $15.5 billion fostering social equality, becoming the latest in a series of big Chinese companies to take up Beijing’s drive for what it calls “common prosperity.”
Businesses and individual entrepreneurs are in some cases pledging billions of dollars to good causes, and companies have quickly adopted the newly popular slogan, as they seek to stay on the right side of President Xi Jinping’s government amid a series of corporate crackdowns.
Alibaba said Thursday it would spend 100 billion yuan, the equivalent of $15.48 billion, by 2025 in support of Beijing’s common prosperity campaign, confirming a report in the Zhejiang News, an outlet run by the provincial branch of the Communist Party.
The report listed a series of uses for the money, including funding for technological innovation, supporting economic growth and agricultural modernization in less developed regions, and bridging the digital divide between urban and rural areas. Alibaba will also support young entrepreneurs and gig-economy workers, and help disadvantaged sectors of society, the Zhejiang News said.
A fifth of the money would help develop Alibaba’s home province of Zhejiang, the local news media outlet said. The ruling Communist Party’s top leadership designated the eastern province as a showcase locality for common prosperity in May.
Alibaba’s pledge is substantial, even for a company of its heft. The e-commerce giant had a market value of about $461 billion as of Wednesday, according to FactSet. Analysts polled by the data provider expect it to generate about $143 billion in revenue in the financial year ending March 2022.
Common prosperity isn’t a new term, but has taken on greater significance recently. It was used by Mr. Xi at a major meeting on financial and economic affairs last month, reflecting his government’s heightened focus on social equality.
That focus helps explain recent clampdowns on powerful technology companies such as Alibaba and Tencent Holdings Ltd. , the gaming and social-media giant, as well as on other businesses seen as contributing to social divides.
A day after Mr. Xi’s comments, Tencent said it would spend the equivalent of $7.7 billion promoting common prosperity this year, by investing in matters such as medical care, education and revitalizing rural areas. It had pledged an investment of equivalent size in April. Tencent was valued at $596 billion as of Wednesday’s market close, according to FactSet.
Businesses in a range of sectors also have jumped on the bandwagon. Companies that have mentioned common prosperity in recent earnings reports include state-owned banking giant Industrial & Commercial Bank of China Ltd. , property developer Logan Group Co., and Ping An Insurance (Group) Co. of China.
“It makes sense for every company in China to align themselves” with the common prosperity push, said Elizabeth Kwik, Asian equities investment manager for Aberdeen Standard Investments.
However, she added: “But it doesn’t mean the government is placing society over earnings or shareholders—they just want companies to play a part and help achieve fair distribution of income.”
Gapping down
In reaction to earnings/guidance:
- CHWY -9.6%, FIVE -8.5%, AI -7.6%, VEEV -7%, DCI -6.3%, RYAN -5.9%, PHR -4.7%, SWBI -4%, SCWX -2.1%, PDCO -1.6%, OKTA -1.5%, HRL -1.5%, GMS -1.2%, SPWH -0.7%
Other news:
- ASMB -22.1% (to discontinue development of ABI-H2158)
- HOFV -9.3% (postpones Highway 77 Music Festival; also files for $50 mln mixed securities shelf offering)
- VIVO -5.1% (expands recall for lead test kits)
- GRIN -3.3% (announces IVS Pinehurst charter extension)
- ASND -1.8% (prices offering of 2.5 mln ADSs at $160.00 per ADS)
- EGLX -1.8% (has acquired GameKnot for $2.75 mln)
- TAK -1% (Phase 3 PANTHER study did not achieve primary endpoint)
- BLFS -0.8% (stock offering)
Analyst comments:
- ALKS -2.9% (downgraded to Underperform from Neutral at BofA Securities)
- UL -2.6% (downgraded to Underweight from Neutral at JP Morgan)
- BUD -2.2% (downgraded to Underweight from Neutral at JP Morgan)
Early premarket gappers
- Gapping up:
- TLSA +22.4%, CHPT +11.9%, ASAN +10.3%, INMB +9.8%, NCNO +7.4%, DTIL +4.5%, GEF +4.2%, NTNX +4%, SMTC +3.2%, GNPK +3.1%, QDEL +1.4%, RKLB +1.3%, MRNA +1.1%, BGNE +0.8%, ACAD +0.6%, DKNG +0.6%, IR +0.5%, SAIC +0.5%
- Gapping down:
- ASMB -21%, HOFV -10.4%, CHWY -9.7%, FIVE -8.5%, AI -7.9%, VEEV -7.9%, RYAN -5.9%, VIVO -5.1%, PHR -4.7%, GRIN -3.3%, OKTA -2.9%, ASND -1.8%, SWBI -1.6%, DCI -1.6%, GMS -1.2%, TAK -0.9%, BLFS -0.8%, SPWH -0.7%, GENI -0.6%
Why Scale Matters in Luxury Goods
Analysts expect larger companies will continue to outperform small ones.
In 2004, LVMH Moët Hennessy Louis Vuitton famously won $38 million in a bias suit against Morgan Stanley — among the contentious claims at the time in the bank’s equity research was that the Louis Vuitton brand was “reaching maturity.”
As if.
The world’s largest luxury brand by revenue continues to grow at a brisk clip, and is now five times the size it was in 2004, according to market sources.
Suffice to say that scale matters in the fashion and luxury sector now more than ever, say analysts and academics.
“We believe that larger companies will continue to outperform,” said Erwan Rambourg, global head of consumer and retail research at HSBC. “I feel that all large powerful brands have become generalists, and do not have a ceiling to growth either.”
Among them, “we see the meteoric rise of Dior continuing with stars being aligned,” he said, also forecasting a “reawakening of Gucci after a period of underperformance” thanks to the brand’s 100th-anniversary festivities and the feature film “House of Gucci” by director Ridley Scott likely to have a strong halo effect on the brand.
“Conversely, Hermès’ growth might not be as strong relative to peers later in the year and early next year as the brand is capped in terms of volume capacity in its core handbag category and unwilling to put through hefty price increases such as those Chanel or Louis Vuitton are putting through,” he noted. “Cartier is already well beyond 5 billion euros in sales and it is quite clear that Tiffany has the potential to get there quite quickly as well.”
In his view, Burberry, Prada and Armani, if well run, could likely aspire to that level of sales as well since they have sufficient brand equity and enough unique traits to theoretically get there.
In recent years, luxury brands have widened their offerings of casualwear and streetwear, small leather goods, color cosmetics and footwear, allowing them to appeal to a broader swath of consumers, analysts agreed, also flagging the importance of collaborations with relevant artists and designers to further fuel their notoriety.
Hermès’ recent beauty launch provides a new entry point to the house.
COURTESY OF HERMÈS
In Rambourg’s estimation, the financial might of luxury’s biggest brands allow them to dominate the social-media discussion and to win the real-estate battle within shopping malls and high streets. What’s more, they also have the capacity to invest in data analytics, CRM systems, concierge services and more to attract new consumers and keep existing ones happy. Knowledge is power in what remains a crowded luxury industry, and scale enables you to rely less on third-party partners and thus derive insights from selling at retail.”
Experts flagged a range of market dynamics that are helping the largest players grow the fastest.
“Major luxury brands benefit these days from three main drivers: First, a catch-up effect after the pandemic; second, a massive shift of consumption to online, and third, the continuous rise of a new global middle- and upper-middle class,” said Frédéric Godart, associate professor of organizational behavior at French business school Insead.
“We view this as late-stage sector consolidation: Bigger brands are increasing their market share versus smaller brands,” noted Piral Dadhania, an analyst at RBC Capital Markets, who rates scale as an important factor.
“Larger brands are growing faster than smaller ones as they have broader product offers, more balanced regional and consumer mixes, and larger marketing budgets to advertise,” he added. “Smaller brands have been finding it increasingly difficult to ‘turn around’ and in general have underperformed larger brands in terms of revenue growth.”
The contrast was marked during the second quarter, when revenue growth versus 2019 stood at 40 percent at LVMH’s fashion and leather goods division, 33 percent at Hermès, 22 percent at Richemont and 11 percent at Kering.
A Lady Dior bag in a Mizza print.
According to RBC calculations, “strong brands,” those with growth rates above the unweighted luxury sector average, are now fewer in number and with a wider growth differential versus less strong brands — with 15 points difference between 2016 and 2019 versus only 10 points between 2010 and 2015.
Thomas Chauvet, managing director and head of luxury goods equity research at Citi in London, said the industry is becoming more polarized, with the conglomerates generating faster sales growth, earnings growth and share-price performance, and many monobrand and mid-size players falling behind.
“The biggest brands in the industry tend to be the most profitable ones,” allowing them to invest in further supporting the brand, product innovation, retail network and the overall customer experience, Chauvet said. “You have the ability to keep competition at a distance.”
Brands with revenues of 100 million euros to 200 million euros tend to have an operating margin of about 10 percent. This compares to about 15 percent for brands with revenues between 500 million euros and 1 billion euros. This rises to about 20 percent for brands that have crossed the 1 billion euro threshold, to 25 percent for those doing between 2 billion euros and 3 billion euros, and to 30 percent or more for those generating 5 billion euros.
“This is a rule of thumb and there will be exceptions, of course,” Chauvet noted. “Smaller brands tend to be less profitable due to less efficient absorption of fixed costs.”
Louis Vuitton is considered the biggest luxury brand in fashion, with full-year 2021 sales estimated to reach 17.5 billion euros, according to RBC.
Chauvet touted the benefits of Vuitton’s “two strict dogmas: no wholesale and no discounts.” Many luxury brands are still in the process of trimming their “residual brick-and-mortar wholesale business as a way to enhance control over distribution and brand equity,” and can take up to several years to exit, he noted.
Meanwhile, Vuitton, which pursued an astute product diversification and premium-ization strategy under chief executive officer Michael Burke, has enjoyed a number of successes in recent years beyond leather goods, including high-end fragrances, high jewelry and watchmaking, and luxury casual streetwear under men’s artistic director Virgil Abloh. All of this supports new customer recruitment and energizes its core leather goods business, Chauvet explained.
Five new Louis Vuitton perfumes in bottles by architect Frank Gehry.
FLORIAN JOYE
“When you have the control over distribution, control over prices, you can do a lot of things that help the brand resonate with new consumers,” he said.
RBC’s Dadhania expects the good times to roll on for luxury’s behemoths.
“Economic factors remain supportive for overconsumption of luxury goods in the next six to 12 months,” Dadhania said. “Excess savings, wage inflation, asset price inflation all contribute to increasing disposable income and ‘feel-good’ factors which are relevant in the purchasing-decision pathway for luxury goods.
“Luxury goods is a sector that is amongst the most defensive in the consumer universe from inflationary pressures given strong pricing power,” he added.
Rambourg noted the “buy less, buy better” attitudes that have been prevalent over the past 18 months, heightening the relevance of leading brands and within those of “signature” or “iconic” products.
“Separately, a post-COVID-19 era has seen the emergence of first-time purchasers who want to be part of the club and flock to leading brands as an insurance of getting it right,” he said. “We still very much believe that luxury is driven very strongly by new recruits, first-time purchasers, rather than repeat purchasers. I trust it has been the case that many of the purchases made since COVID-19 hit have enabled brands to welcome consumers they had never seen prior.”
A poster for “House of Gucci,” directed by Ridley Scott.
COURTESY OF MGM STUDIOS
Analysts agreed that the multibrand or conglomerate model still holds.
Chauvet noted that smaller brands that are part of a conglomerate can often benefit from increased capital allocation and from sourcing, real estate and marketing synergies, while also having access to a talent pool within the group.
“You don’t have that many success stories of small brands becoming big without the support of a conglomerate structure or an anchor investor,” Chauvet said.
According to HSBC’s Rambourg, scale confers “vast” advantages in terms of voice in a crowded space; authority, by being in the driver’s seat with suppliers and clients; synergies in terms of finance and know-how, and talent, since large groups offer high performers rich careers.
What’s more, “scale trumps synergies as brands are run for sales growth and brand equity with high margins being a natural consequence, not necessarily the primary focus,” he said.
Observers see few risks in brands being large, with the most nimble players blunting or avoiding ubiquity quite efficiently.
“With scale and success, there is a risk of complacency and when you lead, you could find it more difficult to find sector benchmarks. Louis Vuitton, Cartier or Rolex are likely looking at Chanel, Tiffany or Patek Philippe, but they really need to look outside the luxury arena or find creative resources internally to continue to attract new consumers and have existing ones come back,” Rambourg noted. “The other issue of scale is in developing bad habits, keeping senior managers too long, resisting change. No one needs luxury. You purchase items because they put a smile on your face. Brands need to find ways to continue to be nimble, fun and flexible despite their size.”
The Chanel store at CityCenterDC.
SAM FROST
Is there a limit to how big a brand can get?
Rambourg said he’s been asked that question for 25 years and the answer is still a resounding “no,” though it depends on how brands are managed.
He said eight years ago, Vuitton seemed “a victim of ubiquity,” having focused on opening stores across the planet, while relying on too few references.
“Consumers got bored and started thinking ‘I’ve seen this too much, I’m fed up, LV is too visible, it’s a brand for secretaries,'” Rambourg related.
Fast forward to today, and the brand is generating double the sales since then, “celebrating the 200th anniversary of its founder’s birth, and I haven’t heard any consumer in a while telling me she was fed up with the brand or had seen it too much.”
“Hyper-segmentation of product offering, retail experience, social media content, communication and more has had consumers be surprised and delighted by the brand,” he continued. “Separately, who would have thought LV could build credibility in areas such as fragrances or jewelry just a few years ago. The strength of the brand, its creativity and daring nature have meant that anything is possible.”
According to Godart, the main risk of enormous scale in a luxury brand is to be perceived as “masstige” and not true luxury.
“But the fact is that strong creativity and constant renewal can mitigate this risk. Also cushioning the blow is the rise of a global middle class, and the alignment of luxury with sustainability.
“And if a brand becomes really too big, then conglomerates can grow alternative brands to replace them, and grow as a group,” he concluded.