EUR 850.00 For Business Accounts Only

Morningstar | Bears' Window Narrows as Our Thesis Plays Out: GE Sells BioPharma to Danaher

On Feb. 25, narrow-moat-rated General Electric announced it has agreed to sell its BioPharma business to Danaher for approximately $21.4 billion, including $21 billion cash and assumption of certain pension liabilities (about 17 times forward EBITDA). We had speculated that this deal was possible as early as last year and wrote that the deal would be "approximately $20 billion at current forward enterprise value/EBITDA multiples." The GE Life Sciences unit will join Danaher’s Life Sciences as a stand-alone business. Pharmaceutical Diagnostics, which currently forms part of GE Life Sciences, will stay with the remainder of GE Healthcare. That business supplies contrast media and molecular imaging consumables for radiology customers. This carve-out clearly makes sense to us, given the synergies with the remaining GE Healthcare’s core medical imaging business. While we’re still evaluating the full impact of this transaction, mostly as to timing, we’re not overly surprised by the deal and don’t expect to materially change our GE fair value estimate of $13.80 per share.

Danaher had expressed interest in this business as early as the spring of 2018, as reported by The Wall Street Journal . At the time, however, GE was reportedly not interested in pursuing a deal. While GE is losing one of its bright stars that typically increases its top line at a high-single-digit year-over-year clip, we think CEO Larry Culp is making the right strategic decision. First, while this deal may make the GE Healthcare initial public offering slightly less attractive, life science valuations are currently high, and this deal offers Culp and his team the opportunity to deleverage the balance sheet. Second, we believe GE Life Sciences has little strategic value to GE’s future as an industrial infrastructure business.

Finally, and perhaps most importantly, asset price discovery for GE’s valuable assets has been relatively in line with our expectations. This contrasts with bears’ assertions that GE will be forced into a fire sale of its most desired assets to dig itself out of its self-imposed debt hole. We further believe bears’ arguments have less wiggle room, particularly as concerns about GE Capital’s liabilities thus far seem less pronounced than initially feared. Furthermore, GE generated adjusted industrial free cash flow of $4.5 billion for 2018. While GE’s operating future remains strained with Power, we believe this confirms our thesis that GE has highly desirable assets that exceed its current stock market valuation.

We expect to fully value the timing of GE Life Sciences, the GE Transportation and Wabtec merger (which closed Feb. 25), and our updated explicit forecast expectations until 2023 concurrent with the 10-K filing this week.