Great growth stories in med-tech really are a "now you see it, now you don't" proposition, as large rivals either whittle away the growth with competition or buy the company outright. The latter proved to be the fate for ZOLL Medical (ZOLL) as this fast-growing med-tech company accepted an all-cash takeover bid.
ZOLL Medical announced that it accepted an all-cash offer from Japan's Asahi Kasei for $2.21 billion, or $93 per share in cash. At this price, ZOLL shareholders get a 24% premium to Friday's close, more than 27 times trailing EBTIDA, and more than four times trailing revenue.
The deal will be structured as a tender offer, which Asahi Kasei will fund with debt, and the break-up fee for the deal is $64 million.
By recent standards in med-tech, this is a pretty strong deal for ZOLL. Baxter (BAX) agreed to pay a little more than three times trailing sales for Synovis in December of 2011, while SonoSite (SONO) attracted a bid from Japan's Fujifilm about a week later at a similar trailing multiple. Although SonoSite's near-term growth expectations were broadly similar to ZOLL's, SonoSite lacked the above-average long-term growth potential offered by ZOLL's LifeVest and temperature control products.
Is This A Fair Deal For ZOLL?
By almost any standard, ZOLL's management got a good deal for shareholders. Not only are the backward-looking valuation numbers solid, but the company will have to grow its free cash flow at a better than 25% clip over the next decade to pay off for Asahi Kasei.
Can ZOLL do this? I think so. LifeVest alone could drive over $1 billion in high-margin annual profits, to say nothing of ongoing profits in defibrillators and potential from AutoPulse and temperature management products.
That said, it's not going to be easy. As LifeVest grows, ZOLL is going to find increasing headwinds from reimbursement and it seems only a matter of time before a cardiac rhythm management company like Medtronic (MDT), St. Jude (STJ), or Boston Scientific (BSX) tries to get into the wearable defibrillator market. What's more, there's the fierce competition in the existing defibrillator business and the emerging temperature management market to consider.
Those would-be competitors are pretty much the only chance of a better deal for ZOLL. Wearable defibrillators have, at a conservative number, a $2 billion market possibility and the active support a major company like Medtronic could certainly grow that number. Maybe $1 billion or $2 billion isn't enough to entice Medtronic (even with higher margins), but it would be significant to St. Jude or Boston Scientific.
Unfortunately, neither seem to have the balance sheet flexibility to make a substantially better offer. Likewise, the multiples that would go with a higher bid would almost certainly leave the acquiring company facing some angry shareholders and highly critical analysts.
A Fond Farewell And A Look Ahead
I followed ZOLL Medical when I was a sell-side analyst, and it has long been one of my favorite companies and management teams. That team will likely stay in place and the company will likely continue to run itself as before, though perhaps with a larger R&D budget as Asahi Kasei looks to healthcare as a corporate growth opportunity. All in all, this is not a bad end for this story.
What interests me more, though, is that this may not be the end of the story. It has been quite a while since Japanese companies were active acquirers of U.S. businesses, but many Japanese companies are now looking at healthcare as a future growth market. Fujifilm and Asahi Kasei may only be the first in a long line of companies to look to build or enhance healthcare franchises around quality U.S. names. Should that prove to the be the case, the next few years could be even more interesting for those smaller growth names.