Covidien’s purchase of Given Imaging is third biggest deal announced this year
Sometimes you find what you were looking for only after having given up the search. In January this year Israel’s Given Imaging abandoned its attempt to find a buyer and resigned itself to an independent life. Yesterday, though, it announced that Covidien would acquire it for $860m cash, prompting its shares to rise 25% in early trading today on the Nasdaq.
Covidien swooped on the PillCam maker with an offer of $30 per share, a 27% premium to the price at close on Friday. The companies intend to put Covidien’s marketing vigour behind Given’s PillCam gastrointestinal imaging technologies, and with an updated form of the PillCam COLON set for US approval any day, the deal comes at the right time.
The acquisition is the third largest to be announced this year, following Valeant Pharmaceuticals’ buy of Bausch + Lomb for $8.7bn in May and Bayer’s takeout of Conceptus for $1.1bn a month earlier. It is due to close by the end of March 2014.
Having divested its pharma business, Mallinkrodt, in June to become pure-play medtech, Covidien is clearly trying to bolster its device offering in one of its core areas (Covidien aims for AbbVie mk II with Mallinckrodt spinout, May 8, 2013). Its endoscopy business is its largest unit, with sales of $2.3bn last year. This is currently forecast to grow at a CAGR of 5% to reach $3bn in 2018, EvaluateMedTech data show.
PillCam sales may be expected to accelerate this. Its third quarter results were positive, with the company’s revenue, around two thirds of which comes from PillCam sales, topping $50m for the first time, up 10% from 3Q 2012. Its sales are predicted to grow at a CAGR of 13%, reaching $254m in 2018, according to EvaluateMedTech.
Sales growth ought to be aided by the fact that the older version of the device that records the data transmitted by the PillCam, around 8,000 of which are installed worldwide, will not work with the next generation PillCam devices, including the PillCam COLON 2. If Given phases out the older iterations, customers will eventually be forced to upgrade the data recorder.
PillCam COLON 2 is initially intended for patients who cannot undergo colonoscopy, the gold-standard diagnostic for gastrointestinal disease, though Given hopes to expand this indication in time (US approval for colon camera pill looks a Given second time round, May 22, 2013).
The biggest winner from the transaction may in fact be investment fund Discovery Group. One of Given’s largest investors, Discovery sent a letter to Given’s management in October urging it to conduct a $50m share buyback and a subsequent buyout. It said that it could be expected to achieve a value of $26 to $30 per share – right on the money.
Discovery had also urged Given to take advantage of a quirk of Israeli law permitting a lower rate of tax – 10% instead of 25% – on around $54m of its profits. These so-called “trapped profits” had been accumulated under another law which entitles companies refrain from paying taxes as long as they do not release the profits. The company has taken Discovery’s hint and decided in November to return excess cash to shareholders. Analysts at Cantor Fitzgerald said that around $43m could be released.
Given has followed its backer’s advice almost to the letter, to the obvious delight of its shareholders. Should PillCam COLON 2 get approved in the US as expected, Covidien’s shareholders will have reason to celebrate too.