If you want to distract from some fairly miserable financial results, announcing a multibillion-dollar acquisition is one way to do it. 3M’s purchase of the wound care group Acelity for $6.73bn comes on the heels of a wretched first quarter in which 3M missed forecasts, cut its outlook and said it would lay off 2,000 employees.
The deal – this year’s biggest, and the second largest purchase of a private company in 10 years – also provides Acelity’s private equity backers with their exit while avoiding the rigmarole of an IPO. The group had filed for a listing last month.
Acelity had sales of $1.5bn in 2018, which will boost 3M’s medtech operations meaningfully. The conglomerate, which makes everything from welding helmets to sticky tape, had medical device revenues of $5.7bn last year – around 17% of its overall sales. These are mostly from dental and wound management products.
3M cannot be accused of buying in growth, however. Its own medtech business is forecast to grow at around 5%, EvaluateMedTech’s sellside consensus data suggest, compared with Acelity’s 2%. Moreover the transaction’s value includes Acelity’s debt, which was $2.4bn at the end of last year.
3M is doing some borrowing of its own, financing the deal with a mixture of cash and new debt. It has scaled back its planned share repurchases to conserve cash, and will limit its buybacks to $1-1.5bn from a planned $2-4bn.
Some analysts are not impressed with this decision, pointing out that 3M is paying 15x Ebitda for Acelity when it could have bought back its own stock for a 13x multiple.
It is also possible that any plans to wring cost savings from Acelity might run into trouble. Acelity has cut its headcount by around 1,000 over the past few years and its Ebitda/employee ratio comes in at $94,000, only slightly below 3M at $98,000. There may not be much low-hanging fruit when it comes to synergies. With that in mind it is possible that Acelity’s owners, a consortium of funds led by the private equity shop Apax Partners, are the real winners of the deal. The company has been dancing the stock market hokey cokey over the past few years, filing for an IPO in 2015 before pulling it just over a year later. It filed again two weeks ago.
Apax will now get a faster, cleaner exit than a flotation could have delivered. 3M’s investors will have to wait much longer to see their returns.
|Top five medtech M&A deals of 2019|
|May 2||3M||Acelity||6,730||Wound management|
|February 13||Johnson & Johnson||Auris Health||5,750||Endoscopy; general & plastic surgery|
|March 8||Hill-Rom||Voalte||195||Healthcare IT|
|*Powervision was bought by Alcon, since spun off by Novartis. Source: EvaluateMedTech.|