Cardinal Health - Still Some Questions About The Strategic Acquisition Of AssuraMed

| About: Cardinal Health (CAH)

Shares of Cardinal Health (CAH) rose 1.2% in Thursday's trading session. The healthcare company announced the acquisition of privately-held medical supplier AssuraMed.

The Deal

Cardinal Health announced that it has agreed to acquire AssuraMed, a leading provider of medical supplies to patients at home, in a deal valuing the company at $2.07 billion, or $1.94 billion excluding the present value of tax benefits.

With the acquisition, Cardinal expects to better serve the growing population of aging and chronically ill people who increasingly stay at home. The addition furthermore broadens the product portfolio and allows for better and more cost-effective solutions.

AssuraMed currently distributes more than 30,000 products to over 1 million patients across the country.

CEO and Chairman George Barrett commented on the deal, "AssuraMed is a natural extension of the Cardinal Health business and of our mission to be essential to care. The acquisition of this industry leader allows us to serve the growing number of Americans treated in home settings - particularly those patients recovering from acute episodes and those suffering with chronic diseases."

AssuraMed generated roughly $1 billion in sales in the calendar year of 2012, including the acquisition of Invacare Supply Group. The price tag values the business at approximately 2.0 times annual revenues.

The deal is expected to add roughly $0.02-$0.03 per share to the fiscal 2013 non-GAAP earnings of Cardinal, with accretion increasing to an estimated $0.18 per share in 2014. Cardinal has not issued an earnings accretion estimate based on GAAP earnings given the timing and valuation of intangible assets. The company explicitly states in the press release that it expects amortization of intangible assets to be a "significant" expense in 2013 and 2014.

The deal is expected to close in April of 2013 and is subject to regulatory approval and other normal closing conditions. Cardinal has already obtained shareholder approval from AssuraMed's shareholders.


Cardinal Health ended its second quarter of its fiscal 2013 with $2.26 billion in cash and equivalents and $2.90 billion in short- and long-term debt, for a net debt position of roughly $640 million. The company will finance the deal with cash at hand and a new $1.3 billion senior unsecured bridge loan from Bank of America/Merrill Lynch (BAC).

For the first six months of the year, Cardinal generated revenues of $51.1 billion on which it net earned $575 million, or $1.67 per share. The company is on track to generate annual revenues just North of $100 billion on which it could earn $1.1-$1.2 billion.

The market currently values Cardinal at $15.7 billion. This values the firm at roughly 0.15 times annual revenues and 13-14 times annual earnings.

Cardinal pays a quarterly dividend of $0.28 per share for an annual dividend yield 2.4%.

Some Historical Perspective

Shares of Cardinal have traded around the $40 mark for most of 2012 and have recently inched up to $46 per share. At these levels, shares have recovered from lows of $25 back in 2009, but remain far removed from highs set around $70 back in 2006 and 2007.

Between the fiscal year of 2009 and 2012, Cardinal has grown its annual revenues from $96.0 billion to $107.6 billion, while earnings stabilized just North of $1 billion, with exception of a particular difficult 2010.

Investment Thesis

Shareholders of Cardinal reacted cautiously optimistic to the announcement of the deal. It is unfair to compare revenue multiples of Cardinal and AssuraMed given the large distribution activities of the former. However, if we split up the revenues of Cardinal's own segments, we can see the valuation seems rich. The medical segment of Cardinal is on track to generate annual revenues of $10 billion, while the pharmaceutical segments will generate the remainder roughly $90 billion in revenues.

Based on this revenue distribution, the multiple at 2.0 times annual revenues seems a bit rich on a stand-alone basis. Attaching a similar multiple to Cardinal's medical segment would value the company at $20 billion, which exceeds the current market capitalization of $15.7 billion and attaches no value to the pharmaceutical division at all.

It is promising that the deal adds to non-GAAP earnings in 2013 and 2014, but shareholders should be aware of significant amortization expenses. Unfortunately, the company did not specify the size of these expenses or possible revenue and cost synergies.

The strategic fit and rationale for the deal seems sound. However Cardinal did not provide much information regarding key financial data surrounding the deal. Based on the information given, the deal seems a little rich.

The overall valuation at 13-14 times earnings and the modest 2.4% dividend yield are not convincing enough for me to initiate a long position, especially considering this possible "expensive" although strategic acquisition.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.