As healthcare treatments become more complicated, Siemens Healthineers hopes to profit by keeping things simple for customers. The spin-off from German industrial giant Siemens will acquire US radiotherapy group Varian Medical Systems for $16.6bn (€14bn). That steep price is justified by Varian’s dominant position in radiotherapy. The purchase takes Healthineers closer to becoming a one-stop shop for hospital equipment.
Healthineers has been the big success story from the Siemens stable in recent years, accounting for an ever-growing proportion of the parent’s value. The deep-pocketed conglomerate will trim its 85 per cent stake, even as it smooths the progress of the transaction.
Siemens is providing bridge finance, which Healthineers will repay by issuing new equity for up to half the deal price, or 15 per cent of its current market capitalisation. Siemens will take the dilution while putting up loans to Healthineers for the balance of the consideration.
The premium is unexceptional — 24 per cent of the undisturbed share price. But that is equivalent to 34 times Varian’s forward earnings. And potential synergies, including unreliable “revenue opportunities”, would be just $350m annually (€300m) by 2025. Taxed and capitalised, these fail to cover the premium by $600m. The gap balloons to $2.3bn if only cost cuts are considered.
Revenue opportunities are too nebulous to include in assessments of premium value. Conversely, acquirers would miss strategic opportunities if they only struck deals whose prices were covered by cost cuts.
Healthineers already leads in imaging machines and has a strong position in diagnostics. Siemens partly retreated from radiotherapy in 2012, facing fierce competition from Varian and Swedish rival Elekta. A legacy presence plus Varian will give Healthineers 60 per cent market share, think Berenberg analysts.
Hospital equipment is a large, long-term industry with a shrinking pool of suppliers and some technological complexity. The scarcity value of Varian was confirmed by the share price reaction of Elekta — 12 per cent higher on the day. Providing Healthineers integrates Varian well, it should be able to make the deal work.
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