Danaher to acquire Cepheid
On September 6, 2016, Danaher (DHR) announced that it has entered into a definitive agreement to acquire Cepheid (CPHD) for a total consideration of about $4 billion. Cepheid produces molecular diagnostic systems used in clinical settings to diagnose life-threatening diseases such as HIV (human immunodeficiency virus), hepatitis, tuberculosis, and certain types of cancer. Cepheid has the largest installed base of any molecular diagnostic (IHF) platform. Its broad test menu delivers systems for institutions and hospitals (XLV) of any sophistication.
Cepheid will be integrated as an independent operating company into Danaher’s diagnostics segment. Roche Diagnostics (RHHBY) is the number-one player in the molecular diagnostics arena and is one of Cepheid’s key competitors.
Cepheid’s revenues have increased at a compound annual growth rate of 14.7% since 2011. The company has gross profits of about 50% of sales. However, it’s been operating income-negative for most of its existence.
More recently, Cepheid has been operating income-negative due to research and development costs of more than 21% of its sales. Its selling, general, and administrative expenses of ~33% of sales are higher than the comparative figure of 29% for Danaher. The company’s long-term debt is currently 34% of its total assets. We’ll take a look at Danaher’s plans to inject its operational efficiency into Cepheid in the next part of this series.
Cepheid shareholders to make a windfall
Based on the agreement, Danaher will pay $53 per share, or a 53% premium, to Cepheid’s closing price of $34.42 on September 2, 2016. Cepheid shareholders are expected to receive this amount in cash after the deal is closed by the end of the year. On September 6, 2016, Cepheid shares closed at $52.53, slightly lower than Danaher’s offer, to account for the time value of money until the end of the year.
For insights on excess returns and a business analysis of Danaher, please refer to Should Danaher Corporation Be a Part of Your Portfolio? and Danaher’s Pall Corp. Buy Still Breathing Life into Its Business.