Philips: healthier rating
Acquisition of Spectranetics could result in a higher stock valuation
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Buying a business that trades at a far higher multiple of profits than your own is often a route to value destruction. But one eventual consequence of Dutch healthcare group Philips’ latest acquisition might be a higher valuation for its own stock.
On Wednesday, Philips said it would buy Spectranetics, a lossmaking US vascular devices group, for $38.50 a share or $1.7bn, in cash. That is 27 per cent above its undisturbed price and seven times its 2016 sales. Its previous medical acquisitions Volcano, Intermagnetics and Respironics were done at three to four times sales.
At least it can afford the indulgence. Philips’ own balance sheet is lightly geared with net debt of about a year’s earnings (before interest, tax, depreciation and amortisation). Its two-fifths stake in Philips Lighting, whose shares have risen 50 per cent this year, is worth €2.1bn. And it has €1.3bn coming in from the pending sale of Lumileds, another lighting business, to private equity groups.
The Dutch group justifies the price by pointing to Spectranetics’ rapid sales growth, and by promising cost savings and extra sales as it pushes the US group’s products — currently sold overwhelmingly in the US — through its international sales force. Philips thinks its image-guided therapy sales could reach €1bn by 2020, from about €400m now. Even so, it does not expect the acquisition to cover its cost of capital for five years.
Meanwhile, Philips’ own shares are re-rating as it sheds its industrial past. Its enterprise value is now 9.9 times ebitda; back in 2011, it was just five. Earlier this year, index provider Stoxx moved it to the healthcare sector, where valuations tend to be higher than among industrials. One day, it may be able to do deals like this with stock as well as cash.
Still, a flush balance sheet and more highly valued shares should not be a cue to throw caution to the wind.