Boston Scientific: A Buyout Waiting to Happen

Includes: BSX, JNJ
by: Greg Wilder

Boston Scientific Corp. (NYSE:BSX) leveraged buyout rumors circulated throughout most of 2006 and 2007. A leveraged buyout has typically been mentioned as what will happen to BSX, though Johnson & Johnson (NYSE:JNJ) has also been mentioned as being a possible acquirer.

Since 2004 BSX has seen strong negative momentum, dropping to its low, at 28% of what its market cap was at its peak. Even during the last two years while takeover and leveraged buyout rumors have circulated the stock has continued its decline. In the end of May, 2007 negative rumors were circulating on BSX's stent sales, and we saw fulfillment of that near the end of July.

However, even throughout these times, leveraged buyout rumors have continued to circulate steadily. The rumor has become cliché, and is to the point where people who are familiar with the rumor say "There it goes again... It will happen some day".

Boston Scientific Corp

Boston Scientific Corp currently has a market cap of $19.45B. At the beginning of the year it had a market cap of over $25B, so over the past year the company has become more and more attractive for potential buyers, even with the disappointing news on stent sales.

BSX develops medical devices that are used in interventional medicine. Most of their sales come from their cardiovascular business groups, including their stent sales. With fast food sales on the rise, the need for interventional medicine will only increase in the coming years, even with a temporary slowing.

Johnson & Johnson as an acquirer

If Johnson & Johnson wanted to acquire Boston Scientific, it would be fairly simple. JNJ currently has almost $26B in current assets and a market cap of almost $180B. In their current state, JNJ would be able to acquire BSX for cash or stock if they so desired.

People ask if a takeover by JNJ would make sense, as most of us think of the consumer division of Johnson and Johnson. However, Johnson & Johnson does have a medical devices division, and in May 2006 they acquired Vascular Control Systems Inc, so such an acquisition would not be entirely unheard of and would even fit in well with their current products.

An acquisition of BSX would help expand their business and market share in the medical devices market. JNJ recently announced an offering of $1.5B in notes rated AAA. The S&P expects JNJ to use the proceeds to repay commercial paper. Could it be possible, however, that they are going to use the proceeds to fund a large acquisition? Time will tell.

A Leveraged Buyout [LBO]

Boston Scientific Corp appears to be a prime leveraged buyout opportunity. With a market cap of $19.44B, and total equity of $15.8B (81% of their market cap) they look very attractive for a leveraged buyout. The company has, overall, been growing along with their free cash flow. It wouldn't take very long for a leveraged buyout firm to repay their debt on the company.

In the past, Blackstone (NYSE:BX) has been mentioned as being interested. Other private equity consortiums have also been rumored. In April of this year, Bernstein came out with a report saying that private equity could pay into the $20s for BSX and that further expense reduction could make a price around $30 reasonable. If private equity would do the expense reduction themselves, they would have grabbed on to one of the most potentially profitable deals out there.

The numbers for Boston Scientific Corp are attractive to potential buyers. The company itself is attractive for the future and continues to grow. Rumors that they are a leveraged buyout candidate are certainly not unfounded, and you can bet that private equity has been eying BSX over, especially at these recent attractive values.

As has been said about a BSX takeover in the rumor world, "There it goes again... it will happen some day."