Cooper Companies (NYSE:COO) announced the purchase of its European counterpart, Sauflon Pharmaceuticals. With the deal, Cooper will improve its growth profile and offerings in 1-day lenses, among others. The company is paying a premium multiple for Sauflon, which makes me a bit cautious.
I believe the long-term implications of the deal will be nice, but do not think that the current deal is an obvious bargain. That being said, the long-term growth trajectory and long-term vision support shares going forwards. After the very strong momentum in recent times and following the deal, the immediate appeal has gone.
The Deal Highlights
Cooper Companies announced that it has entered into a definitive agreement to acquire Sauflon Pharmaceuticals in a deal valuing the business at $1.2 billion.
Sauflon is a UK-based manufacturer and distributor of soft contact lenses and related solutions. The company is anticipating to post revenues of $210 million for the year ending in October of this year. If achieved, revenues would be up about 22% compared to the year before.
The transaction is expected to close before the end of the fiscal year, ending in October of this year.
Strategic And Financial Rationale
Sauflon manufactures and distributes soft contact lenses under its lead product "clariti 1 day", which received FDA approval in August of 2013 and was launched in March of this year.
The company has been privately held upto now, and employs about a 1,000 workers in the UK as well as Hungary. With the acquisition, Cooper expands its presence in underpenetrated areas like 1-day silicone hydrogel lenses. This sub-segment is worth about $400 million in a $3.1 billion "1-day" market. Sauflon is active in all sub-product categories like sphere, toric and multifocal.
Based on the company's investor presentation, Cooper is set to boost its global market share by about 1.4% to 20%, still trailing competitors like Alcon and Johnson & Johnson (NYSE:JNJ). Its market share in Europe, the Middle East and Africa is seen up by 6% to roughly 30%, surpassing Johnson & Johnson to become the second-largest player in this geographical area.
Most interesting in the deal is the 1-day silicone hydrogel business, for which sales for 2014 are seen up by 43% to $85 million. Cooper was relatively underrepresented in this large growth area, and fixing this "gap" was important in the ambitions to grow the market share, according to its long-term plan.
Furthermore, the recent entrance in the US, proven technology and good brand recognition should propel growth going forward of the acquired activities.
The deal values Sauflon at roughly 5.7 times sales, and is anticipated to be accretive to earnings per share in the fiscal year of 2015. This is a premium compared to Cooper's revenue multiple of 3.8 times sales before the deal has been announced, as investors are pleased with the improved growth profile.
The company did not yet quantify the expected accretion. Investors can expect an update on the anticipated accretion when Cooper will release its third-quarter results at the end of the summer. The company will also provide further commentary on its Analyst Day, which is scheduled to be held on the 11th of September of this year.
Cooper ended the first quarter with merely $83 million in cash and equivalents. Total debt stood at $335 million, for a net debt position of about $250 million. Following the announced deal, this net debt position will increase towards $1.4 billion in a deal to be financed with existing modest cash balances and credit facilities.
Given the strong earnings and low volatility of those anticipated earnings, there are no large leverage concerns following this deal. While there are few direct competitors with such a large focus on vision and lenses, typically, medical device companies have the capacity to take on quite some debt.
Earlier this month, Cooper released its full-year guidance for the fiscal year of 2014. Total sales are seen between $1.685 and $1.725 billion, while GAAP earnings are anticipated between $6.78 and $7.00 per share. On the back of the deal, revenues will now approach an annual run rate of $1.9 billion.
Shares of Cooper rose to $147 on the back of the deal, in a move which added roughly half a billion to its market valuation, which currently stands at $7.0 billion. This values equity at 3.7 times sales, including the addition of Sauflon. Shares trade at 21-22 times earnings, based on the company's guidance, which excludes any profit contribution from Sauflon.
Cooper's $0.03 per share semi-annual dividend is negligible.
Takeaway For Investors
Despite making a sizable overseas deal, nothing has been mentioned about a potential "inversion" move to benefit from lower UK tax rates. This is not a surprise, as Cooper already has a very low effective tax rate in the single digits.
The acquisition is a bit pricey, but still investors are very enthusiastic about the deal. Cooper pays 5.7 times sales versus its own valuation at roughly 3.8 times sales. As such, Cooper is paying a roughly 50% or $400 million premium compared to its own valuation based on revenue multiples alone. It should be noted that Sauflon is growing much more rapidly, while earnings details have not been released.
Still, investors are very pleased with the deal, adding over $500 million to Cooper's market valuation, as the deal gives more access to the fast-growing silicone hydrogel business. The "premium" paid and bullish run on Tuesday, on top of the "normal" price paid for Sauflon seems a bit of an overreaction to me.
Earlier this month, I checked out Cooper's growth prospects, following the release of its ambitious growth plan for the period of 2014-2018. The company laid down a vision of market share gains, acquisitions and margin expansion. Less than a month into the plan, a first sizable deal has already been announced.
The solid growth has resulted in a strong run-up in its shares in recent years. Shares have roughly ten-folded from levels in their mid-teens by 2009 to current levels at $145 per share. Solid revenue growth, margins expansion and valuation multiple inflation all contributed to the rise.
Shares trade at fair multiples, just slightly above market averages. This is justified given the comforting growth roadmap and anticipated industry growth. The high growth and still reasonable shape of the balance sheet is comforting as well, although I do not find shares a screaming buy anymore at current levels.
A correction towards $120 per share would be a great level for me to pick up some shares in this solid player. At those levels, shares would trade at similar multiples compared to the wider market, while a modest premium might be deserved given the excellent track record of the business.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.