Medical products company Hill-Rom ($HRC) is using its $2 billion acquisition of patient monitoring and diagnostics player Welch Allyn to decrease its reliance on sales of large, acute care capital equipment--which are highly subject to pressure from macroeconomic changes. With the deal, Hill-Rom will add a slew of patient-oriented diagnostics and monitoring products that it expects to be able to more effectively market internationally and in the U.S. It also expects that Welch Allyn will provide a good foundation for future M&A deal making activity.
Welch Allyn shareholders will get $1.625 billion in cash and the remainder in 8.1 million newly issued Hill-Rom shares for a total of about $2.05 billion. Former Welch Allyn shareholders, of which there are about 75, will hold about 13% of the combined company.
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| John Greisch |
"This deal gives us the scale to be an even more relevant partner to acute care providers and expands our reach into primary and post-acute care," said Hill-Rom President and CEO John Greisch on a conference call about the acquisition. "Welch Allyn also provides us with a large, more diverse platform that will enable new M&A opportunities in the future," he added.
Hill-Rom has 5 core existing businesses: Advancing Mobility, Wound Care and Prevention, Clinical Workflow, Surgical Safety and Efficiency and Respiratory Health.
"We're acquiring the leader in point of care diagnostics and testing and expanding the strength of our presence across the care continuum. In addition, we expect to leverage our international infrastructure to grow Welch Allyn's international presence," Greisch continued. "We are particularly excited about the opportunity to provide enhanced patient information connectivity solutions by combining Welch Allyn's patient monitoring and diagnostic capabilities with our bedside connectivity capability."
The combined company will have about $2.6 billion in annual revenue, with more than $500 million in adjusted EBITDA. Alone, private company Welch Allyn has about $700 million in revenues, with 70% of that coming from North America, 16% from Europe and the remaining 14% from Asia Pacific.
But Welch Allyn's compounded revenue growth rate has only been about 3% over 2011 to 2014. Hill-Rom is betting it can improve upon that by adding Welch Allyn products through its vast existing sales infrastructure.
"We are confident, we can accelerate the growth rate of their product portfolio, not just internationally, but here in the States," Greisch said on the call.
For its part, Hill-Rom guided to 10% to 11% revenue growth for fiscal 2015, with adjusted EPS for the year of $2.50 to $2.54. It will continue its dividends unaltered, but will halt its share repurchase program to divert that cash to support this deal.
With the combined company, large acute care capital equipment purchases will make up less than one-third of revenue--down from well over 50% three or four years ago for Hill-Rom. The idea is that Welch Allyn will further diversify Hill-Rom, adding to its non-capital equipment areas that include surgical, rental and service revenues.
Hill-Rom expects to reduce the combined annual run-rate by at least $40 million by 2018 through facility optimization, procurement efficiencies as well as general and administrative expense reductions. It expects the transaction will be more than 10% accretive to adjusted EPS in 2016 and even more so thereafter. The transaction is slated to close before the end of September.
Greisch will be the president and CEO of the combined company. Some of Welch Allyn's senior management is expected to join it as well, but those details remain undisclosed thus far. The company will be headquartered in Chicago, IL, but maintain a presence in Skaneateles Falls, NY, where Welch Allyn is headquartered.
Wall Street gave the deal a quick endorsement--sending Hill-Rom shares up 9% in early trading on the June 17 news.
- here is the release