EUR 850.00 For Business Accounts Only

Morningstar | Danaher Boosts Attractive Biopharma Customer Exposure Through $21 Billion Deal With GE

We have a mostly favorable outlook on Danaher’s plan to acquire GE’s biopharma business for $21.4 billion, or approximately $20 billion when including an expected $1.4 billion tax benefit. In many ways the acquisition isn’t a major surprise since the business fits the mold of Danaher’s strategic direction--a high growth and high margin business with a large stream of consumables to a sticky customer base. From cell culture media, single-use manufacturing products, to chromatography systems, GE’s biopharma assets share a significant amount of strategic overlap with Danaher’s existing life sciences business. Overall, we don’t expect a dramatic shift in our fair value estimate as we incorporate the acquisition into our model. While we also don’t expect a change to our narrow moat rating, we view the transaction as an incremental positive to Danaher’s narrow economic moat.

We think the purchase price, which implies roughly 17 times 2019 EBITDA, looks fair, especially given the segment's high exposure to the biopharma customer group, which boosts Danaher’s exposure to this attractive portion of the life sciences market. The biopharma customer segment not only offers a higher growth outlook thanks to demand for biologic drug development and manufacturing, but also a sticker base of users around the regulation of inputs for approved pharmaceutical products. Management expects 6% to 7% growth for these assets, which may be conservative as management will likely prioritize investing in the higher growth portions of the business such as single-use technology and gene therapy products.

Thanks in large part to its large consumables mix near 75% of sales and already high profitability, management only sees about $100 million in cost synergies over three years, which implies an impressive EBITDA margin near 40%. Management also expects an initial $0.45 to $0.50 boost to adjusted EPS during the first year, likely doubling within five years.

As with the past few years of Danaher’s purchases in the higher growth life science and diagnostic markets, management is willing to take a longer-term view on return on invested capital, with a high single-digit return expected in five years.

Lastly, Danaher expects the deal to close in the fourth quarter, financing the deal with cash on hand, new debt, and issuing near $3 billion in equity. Danaher will likely inherit some pension liabilities from GE, and management expects a BBB+ credit rating following the transaction. Management also announced it now intends to IPO its dental business--potentially with 20% of shares initially issued--rather than the previous spin-off plans.