Merit’s acquisition spree ought to spur growth

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Merit Medical Systems’ decision to acquire not one but two companies in a single week ought to enable it to expand its interventional cardiology and dialysis operations, and to boost its revenues by more than 10%.

Merit, itself active in diagnostic and interventional cardiology, as well as radiology and endoscopy, announced last week that it was to buy GE Healthcare’s subsidiary Thomas Medical, which specialises in vascular access devices. The $167m all-cash deal is expected to close by the end of the year. The second acquisition, announced on Thursday, will see Merit buy the assets of dialysis catheter manufacturer Medigroup for an undisclosed amount.

Debt

The Thomas buy – Merit’s largest to date – will net the South Jordan, Utah company a portfolio of products used in electrophysiology, cardiac rhythm management, interventional cardiology and interventional radiology procedures. The catheter-based technologies include sheaths used to insert pacemaker leads and devices used to aid catheter ablation, a treatment for atrial fibrillation. Thomas Medical was founded in 1990 and acquired by GE Healthcare in 2008.

Merit said that Thomas Medical would generate revenues of approximately $37m this year with gross and operating margins of around 55% and 44% respectively. That $37m would boost Merit’s sales to $420m on a pro forma basis, the firm said, adding that the acquisition would be immediately accretive to its net earnings.

Merit also intends to build on Thomas’s businesses in new territories, specifically China, Japan, Russia and the Gulf States.

Merit has a market cap of $583m and only $10m cash in the bank, and will have to expand its credit facility with Wells Fargo Bank to $275m to pay for Thomas, at a Libor-based interest rate currently amounting to around 2-3.5%. The company also expects to be able to take advantage of tax breaks worth some $43m.

Accretive

The purchase of Medigroup’s assets is more of an unknown quantity. The Illinois firm manufactures peritoneal dialysis catheters and other implantation devices, and once again Merit believes that the transaction will be immediately accretive. Medigroup is profitable with 75% gross margins, Merit said, and has current annual sales of about $2m, mostly in the US. Merit Medical intends begin selling its products worldwide immediately.

Chris Cooley, an analyst at Stephens, said that Merit would see revenue growth of 10.9% in 2012 even before these acquisitions. Merit is at an interesting stage in its development as a company. If these acquisitions increase its profits as swiftly and significantly as promised, it will be one to watch.

To contact the writer of this story email Elizabeth Cairns in London at elizabethc@epvantage.com or follow @LizEPVantage on Twitter

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