Bayer Offers Shareholders In Conceptus An Excellent Exit Opportunity

| About: Conceptus, Inc. (CPTS)

Shares of Conceptus (CPTS) rose 19.5% in Monday's trading session. The developer and marketer of the flagship Essure permanent birth control procedure reported its first quarter results for 2013. More importantly, Conceptus announced that it would be acquired by German-based Bayer (BAYZF.PK) in a $1.1 billion deal.

The Deal

Conceptus announced that is has signed a definitive merger agreement with Bayer HealthCare LLC, based in Leverkussen, Germany.

Bayer will pay shareholders in Conceptus $31.00 in cash for their holdings, valuing the company at around $1.05 billion. The deal offers selling shareholders an almost 20% premium for their shares.

As a result of the deal, Bayer will be able to offer both short and long term permanent contraceptive choices for women. Bayer furthermore expects to accelerate the expansion and development of Conceptus' business with its sales force and distribution capabilities. Following completion of the deal, the workforce of 300 will become part of Bayer's healthcare unit.

Bayer CEO Marijn Dekkers commented on the deal, "Bayer is committed to augmenting its organic growth with strategic bolt-on acquisitions. The acquisition of Conceptus represents an excellent fit for our HealthCare business - specifically in the United States, the world's most important health care market."

Conceptus generated full year sales of $141 million for 2012, on which the company reported an adjusted EBITDA of $28.2 million and a net profit of $5.4 million.

Bayer's offer values the equity of the firm at $1.05 billion. Excluding the net cash position of approximately $75 million, the offer values operating assets at 6.9 times annual revenues and 34-35 times annual EBITDA.

The deal is subject to normal closing conditions, including anti-trust approval and is expected to close halfway through 2013.


Bayer ended its fiscal year of 2012 with $3.3 billion in cash and equivalents, assuming one euro buys $1.30 dollar. The company operates with $12.4 billion in short and long term debt for a net debt position of approximately $9.1 billion.

The company generated annual revenues of $51.7 billion for the year of 2012 on which it net earned $3.18 billion. The market currently values the company at $86 billion, which values the firm at 1.65 times annual revenues and 27 times annual earnings.

The German listing of the stock pays out an annual dividend of Euro 1.90 per share, or $2.47 in US dollars, for an annual dividend yield of 2.4%.

Some Historical Perspective

Shareholders in Conceptus have seen their ups and downs over a longer time period. Shares traded as low as $1 back in 1999 to reach highs of $22 three years later. From that point in time, shares have traded mostly within in a $10-$20 trading range. Over the past two years, shares advanced from $10 at the end of 2011, to trade with gains of over 200% towards the offer level at $31 per share.

Between 2009 and 2012, Conceptus reported a mere 7% increase in annual revenues to $140.7 million. Net income fell from $8.0 million to $5.4 million in the meantime. Conceptus is off to a strong start in 2013. First quarter sales rose by 17.5% to $34.1 million, while operating expenses fell by 11.9% to $24.4 million. Consequently, the company reported a $1.9 million net profit compared to a loss of $2.8 million last year.

Investment Thesis

Shareholders in Conceptus stand to receive a fair 20% premium for their holdings after shares already advanced from $10 to $26 in less than two years' time. The deal multiples, at around 7 times annual revenues and 35 times last year's EBITDA seem pretty steep as well indicating that selling shareholders have a fair deal.

For Bayer, the move almost seems opportunistic. Bayer is buying Conceptus as the US company finally seems to be growing its revenues and earnings again, as revenues for the Essure contraceptive jumped 22% in the first quarter.

Bayer is having issues with its birth-control solutions as both sales of Yaz and Yasmin oral-based pills are falling due to generic competition. Sales of the drugs fell by 16% to Euro 206 million in the first quarter of 2013. Essure provides permanent contraception but it does not require surgery or anesthesia. Already some 750,000 women have undergone the procedure since it has been approved by the Food and Drug Administration back in 2002.

While the multiplies are high, and the deal seems a bit opportunistic given the problems with Bayer's own products, shareholders in the German firm should not be too worried.

First of all, the deal is of a very modest size, at just over 1% of Bayer's own market capitalization. Next is the fact that Bayer has demonstrated price discipline in previous acquisitions. Its planned acquisition of Schiff Nutrition last year broke down as Reckitt Benckiser (RBGPF.PK) outbid the firm. Furthermore, the massive sales and distribution capacity of Bayer outweighs Conceptus' current sales infrastructure, and will most likely accelerate growth of the operations in the coming years.

The proposed deal offers an excellent exit point for selling shareholders, while it provides Bayer with a nice addition to its health care unit.

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.