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Research analyst, valuentum
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Summary

  • The economics of every transaction should be evaluated to see if creates economic value.
  • We think Abbott's deal with Mylan is one such transaction that will be value-creative for shareholders.
  • Let's take a look at how we're thinking about the deal in this article.

Abbott (NYSE:ABT) has a track record that is unrivaled. The firm is more than 125 years old and remains aligned with favorable long-term healthcare trends in both developed and developing markets. We believe Abbott's nutritionals segment is one of the most attractive businesses in all of the healthcare space, boasting such brand names as EAS, Myoplex, and ZonePerfect. Let's take a look at the firm's second-quarter results, which it reported Wednesday.

Abbott's sales in the quarter advanced 3% on an operational basis, while ongoing diluted earnings per share came in at $0.54, representing expansion of more than 17%. The bottom-line figure also came in above its previous guidance range of $0.50-$0.52 per share. The strong results prompted Abbott to raise its full-year 2014 ongoing earnings per share guidance to $2.19-$2.29 (was $2.16-$2.26). We note that this represents a double-digit pace of expansion at the mid-point of the range. Fundamentals continue to move in the right direction at the healthcare giant.

The biggest news recently is that Abbott will sell its non-US developed markets branded generics pharma business to Mylan (NASDAQ:MYL). In return, Abbott will receive ~21% equity ownership in a newly-created, publicly-traded entity that combines Mylan with its divested operations ('new Mylan'). The ~$5.3 billion transaction (based on Mylan's closing price on July 11) is expected to close in the first quarter of 2015. The deal will provide diversity to Mylan's operations, add $600 million of annual post-close EBITDA, and offer an optimized global tax structure. Adjusted diluted earnings-per-share accretion of ~$0.25 is anticipated in year one at Mylan, and the firm expects to deliver in excess of $200 million in pre-tax operational efficiencies by the end of year three post-close.

Though Abbott's ongoing earnings-per-share will be $0.22 lower in 2015 as a result of the divestiture, the firm expects the move to positively impact its annual pace of sales and net income expansion by 100 basis points and 200 basis points, respectively, on a go-forward basis. The deal will also free up the executive suite to focus more on its branded generics pharmaceutical business in emerging markets. In the second quarter, for example, Abbott purchased CFR Pharmaceuticals, which will more than double its branded generics presence in Latin America.

We expect the transaction to eventually be value-creative for Abbott shareholders. This, of course, is contingent on Abbott's ~21% stake in the 'new Mylan' eventually being liquidated at a price greater than $5.5 billion--or the market value of the $0.22 earnings stream Abbott will lose beginning in 2015 (1.5 billion shares outstanding x $0.22 per share in 2015 x 16.8 forward price-to-earnings multiple). The incremental value of Abbott's share of pre-tax deal synergies, ~$420 million [(~$200 million / ~10%) x ~21% stake], coupled with its ~21% stake in Mylan (~$5.3 billion) should make this deal a good one for Abbott, however.

Valuentum's Take

June 2014 marked Abbott's 362nd consecutive dividend, dating back to 1924. For investors looking for income stability and strong potential for dividend growth, Abbott is certainly a worthy candidate. The eventual proceeds from liquidating its Mylan position will only serve to bolster the cash that can be delivered to shareholders over time. Abbott does not intend to be a long-term shareholder in Mylan. We don't hold Abbott in the Dividend Growth portfolio (we can't hold every great dividend growth stock), but we certainly like the company. The firm remains on our watch list of dividend growth candidates. To access Abbott's landing page, please click here.

Source: Why Abbott's Stake In Mylan Will Be Value-Creative