Over the past few weeks, it's seeming more and more plausible that Abbott (NYSE:ABT) is ready to move away from its proposed acquisition of Alere. This is mainly due to issues that arose at Alere (ALR) prior to the announcement of the acquisition. Let's look at a timeline here:
- Feb 1st - Abbott announces proposal to acquire Alere for $56, a 50% premium to Alere's current trading price of $37. Alere proceeds to jump up to $54 a share
- March 15th - Alere announces it receives a sub-poena from the DoJ over it's sales practices. Alere drops to $49 a share
- March 21st - Alere receives notice from the NYSE because of late 10-K filing resulting from the aforementioned DoJ issues.
- April 20th - Abbott CEO makes 'non-committal' comments on the Q1 call about the Alere acquisition
- April 28th - Abbott announces it's acquiring St. Jude Medical (STJ) for $25 billion. Alere drops to $43 a share
- April 28-29th - Alere announces Abbott requested to cancel acquisition. Alere drops to $39 a share, almost right back where it was prior to the announcement of the acquisition
Friday, I put out an article on Alere discussing why its proposed acquisition by Abbott seemed much less likely if Abbott's acquisition of St. Jude Medical went through. Not long after that, Alere put out a press release announcing it received an extension from lenders to file its 10-K and that Abbott had requested to cancel it's acquisition of Alere because of it's issues with the DoJ. Put yourself in Abbott's shoes. Why bother with Alere now?
Integration Issues
Abbott is going to have it's hands full digesting St. Jude Medical (STJ), which is much bigger than Alere. Integrating St. Jude and extracting the $500 million of synergies from the deal will likely keep them busy for the next 12 - 18 months. How could they possibly squeeze Alere in as well?
Alere already has accounting issues and is under investigation by the DoJ. Trying to integrate that with Abbott would be an absolute mess. Better yet, it's impossible to quantify what could happen as a result of the DoJ investigation. You never know with the government. Just ask Millennium Health. The government can turn your lights off, and I'm sure Abbott wants no part of that outcome. Whatever synergies they could extract from a deal with Alere, clearly aren't worth the headache.
Potential to Lose Investment Grade Rating
Just by combining St. Jude with Abbott, along with the debt required to fund the purchase, puts Abbott's debt to EBITDA leverage over 6.0x. To offset this, Abbott did state there would be a 'deleveraging plan' to achieve a 4.5x debt to EBITDA initially, primarily by issuing equity to pay down debt. According to Moody's, they'd expect Abbott's unsecured credit rating to drop to Baa3, right on the border of investment grade. Abbott has stated that is plans to structure the deal in order to stay investment grade, which as of now, sound like they will.
Then there's Alere, a troubled, overlevered company with a debt to EBITDA ratio close to 7.0x. Can Abbott acquire St. Jude and Alere and still remain investment grade? Sure they can. Here's there options:
- Acquire Alere and likely lose their investment grade rating
- Acquire Alere and issue equity to remain investment grade, further diluting Abbott shareholders more than they'd like
Does acquiring Alere in any way benefit Abbott shareholders at this point? I'd highly doubt it at this point. Abbott shareholders would likely get diluted from some sort of equity issuance, to the benefit of Alere debt and equity holders, as Abbott is unlikely willing to give up it's investment grade credit rating.
Summing It Up
Abbott would be best to find a way out of the deal with Alere. Right now Abbott is having trouble receiving the material non-public information it need to complete its due diligence on the deal, mainly because of the issues with the DoJ. I'm no expert on merger arbitrage, but with all the issues arising around receiving that information and the potential for something 'material' to arise from the DoJ investigation, I think Abbott will have enough reason to back out of the deal.
