Why would a company agree to be bought for less than its market value? Surely the only explanation is that it was unable to raise money at its current valuation and had no choice but to be bought, even at a woeful discount.
This seems to be the fate that has befallen the Imaging company Analogic, taken private by Altaris Capital Partners in a deal that could be worth up to $1.1bn, which at $84 per share the offer comes in 13% lower than Analogic’s closing price on Tuesday. Analogic conducted a lengthy process to find a buyer, talking to 75 different potential bidders, and the all-cash nature of Altaris’s bid was likely the deciding factor. Still, for some investors Analogic’s chairman’s statement than “the board has always sought to maximise stockholder value” must ring rather hollow.
Analogic’s problem was that it needed to build scale, but did not have – and could not get – the resources for M&A activity of any meaningful size.
Last summer it admitted that it had come to the end of the road, and started casting about for a buyer. Analogic said that Altaris’s offer represented a 25% premium to the closing price on June 7 last year, the day after it put itself up for sale. This cannot have provided much comfort to investors who must have expected any deal to come in at upwards of $100 per share.
According to a transcript of an employee town hall meeting posted on Analogic’s investor website, the deal was struck late on Tuesday, in the full knowledge of that day’s stock price. Analogic's chief executive, Fred Parks, said that the board considered that, but unanimously recommended $84 as a fair number, adding that the company had no reason to expect a better offer to materialise.
Analogic said it faced increasing threats from “larger and better capitalised competitors”, and needed to build scale as a defensive measure. Speaking on an analyst call, Mr Parks said one of the areas that was proving unworkable without greater scale was R&D.
“We needed more volume to support the R&D that we put in. And in some cases we could get that scale, and in many cases we couldn’t,” Mr Parks said, adding that it was fairly common knowledge that the past few years had been difficult in this regard. “Scale would have been a big help here, and perhaps with Altaris and all their connections and capabilities, manufacturing and operations we’ll be able to create that scale for the future.”
Such a plan for the future might have been an important consideration that led to the deal being done with Altaris, analysts from Jefferies believe. They “suspect other offers were on the table but none that featured all-cash terms along with perhaps a coherent plan for the go-forward strategy”. They do not expect a competing offer to arise before the deal closes, which is expected mid-year.
Still, when private equity shops consider the future of their portfolio companies they rarely look more than 10 years ahead, and five is perhaps more usual. Buying a company with few other options is textbook PE behaviour, and while Analogic itself considered but decided against breaking itself up Altaris might not resist this temptation.
Arguably Analogic is well suited to a split-up-and-sell-off approach, since it keeps its three business segments – ultrasound, other medical imaging, and security imaging such as baggage scanners – quite separate. With Altaris very much healthcare focused, security has to be the favourite to go if the new owner does take this route.
Now the deal must go to a vote. The transcript of the employee town hall says Analogic does not yet have the support of its larger shareholders, which will vote its shares at the same time as everybody else. To close, the deal requires the holders of two thirds of all Analogic shares to vote in favour.
Not unwisely, the transaction incorporated break fees. If Analogic calls the deal off it will have to pay $34.8m; if Altaris backs away it must pay $64.2m.
The Analogic sale comes just a week after GE Healthcare, another group known for its imaging technologies, sold its IT operations to private equity, in a deal of roughly the same size (Twilight of the medtech conglomerates, April 3, 2018). The similarities end there: the GE deal seems to have been done at a decent price.