Varian to spin off imaging components biz as publicly traded company by year-end

ProBeam system--Courtesy of Varian

Varian Medical Systems' ($VAR) share price is virtually unchanged from two years ago. That's despite the growing consensus that its proton therapy offers more precise and less toxic treatment for cancer patients than traditional radiation. It's now planning to spin off its imaging components business to help unlock some of that value.

Wall Street sees some potential upside from the deal. One analyst puts a fair value at $69 to $75 per share for the oncology business, with another $13 to $14 for the imaging business, estimated Raj Denhoy of Jefferies. At the high end, that would be an improvement upon Varian's predeal announcement share price of roughly $83. Varian was up slightly in early trading on the news.

"The spin-off will create two strong, independent companies," said Varian CEO Dow Wilson in a statement. "It will enable Varian to focus on expanding its position as a global cancer company with leading technology and services. It will empower the new company to grow as a global leader in components, software and services for expanded imaging applications and markets. By executing this transaction, we will give two fundamentally different businesses independence to optimize their strategies and operations to enhance their growth."

The Palo Alto, CA-based company is already an enormous--with an almost $8 billion market valuation and more than $3 billion in annual revenue. But its revenue growth has been stymied in recent years. Jefferies' Denhoy expects this split could empower both companies to more aggressively pursue M&A and specific R&D investments to ramp up growth.

"The decision to move ahead with a separation was also clearly influenced by a deeper analysis of the growth opportunities in Oncology and Imaging, which both require deeper investments to maximize," he said in a May 23 note. "This will come in the form of higher unchallenged allocation of R&D resources and M&A for both companies."

Specifically, he expects the oncology business will aim for 20% to 25% growth via M&A and R&D investment in treatment planning software and services. He expects the imaging components company to focus on becoming a consolidator in its segment.

Varian Imaging Components makes X-ray tubes, flat panel detectors, connectors and accessories for imaging as well as supplies workstations and software for computer-aided diagnostics and image processing. The newco would have about $575 million in annual revenues and 1,300 employees. It's slated to be led by its current President, Sunny Sanyal, as the CEO, and Varian's Controller, Clarence Verhoef, as CFO.

Varian itself was a spinoff in 1999 from a semiconductor company of the same name. Both companies were subsequently acquired. Since that spinoff, Varian grew its annual revenues from $600 million to more than $3 billion.

Varian will incur a $35 million charge for transaction advisory services related to the deal. The spinoff of the publicly traded imaging components company is slated to complete this year.

"The objectives and growth strategies of our imaging components and oncology businesses are now taking them in different directions," concluded Varian's Wilson. "We believe making these businesses independent will give each of them more freedom to invest in and pursue new growth strategies in their unique core markets."

- here is the announcement