Visit http://indiaer.blogspot.com/ for complete details OPTO CIRCUITS: Acquires Cardiac Science (USA) for ~US$80m; Expands product portfolio & distribution; Early financial turnaround imperative; Rating Under Review
Key highlights of the transaction
- Opto Circuits (OPTC IN, Mkt Cap US$1.2b, CMP Rs304, Under Review) has entered into a merger agreement with Cardiac Science Corporation (CSC), an US based medical device manufacturer.
- Under the agreement Opto has agreed to acquire all the outstanding shares of CSC for US$2.3/share which values the company at ~US$55m. However, apart from this consideration, Opto will have to incur additional expenses of US$25-30m on account of employee severance, etc, taking total acquisition cost to US$80-85m.
- The all cash deal values CSC at ~0.5x sales (including one time expenses to be incurred by Opto) and will be funded through debt (80% of total consideration) and internal accruals.
- CSC manufactures and markets advanced diagnostic and therapeutic cardiology devices and systems, including automated external defibrillators (AED), electrocardiograph devices (ECG), cardiac stress treadmills and systems, diagnostic workstations, Holter monitoring systems, hospital defibrillators, vital signs monitors, cardiac rehabilitation telemetry systems, and cardiology data management systems (informatics), electronic medical record (EMR), and other information systems. The company sells a variety of related products and consumables and provides a portfolio of training, maintenance, and support services. It has operations in North America, Europe, and Asia.
Tender offer details
- The transaction will take form of a tender offer by a wholly owned subsidiary of Opto Circuits, followed by a second step merger. The tender offer is subject to customary conditions including that shares representing at least 60% of CSC’s outstanding stock are validly tendered into the offer.
- As a result of the second step merger, any shares that have not been validly tendered into the offer will be converted into the right to receive cash equal to the offer price of US$2.3/share. The subsequent closure of merger may be subject to obtaining shareholders’ approval of the merger agreement if Opto does not acquire a sufficient number of shares to effect a short form merger. If such approval is needed CSC will call a special meeting of its shareholders to approve the merger.
- The tender offer will close in next 30 days.
Will benefit from distribution leverage; however, early financial turnaround is imperative
- Acquisition of CSC will help expand Opto’s product portfolio in non-invasive business segment which is essential to get access to large distributors. Opto will add products like automated external defibrillators and cardiac treadmills to its non-invasive product portfolio.
- Further, CSC has access to large hospitals in US through its distributors. Opto can leverage this access to market its own non-invasive products. Further, Opto can leverage its own distribution network in Europe and RoW to sell CSC’s products where CSC has very little presence.
- However, concerns remain regarding CSC’s financial health as it has incurred operating losses of US$34m in CY09 which is ~46% of Opto’s FY10 EBITDA. CSC incurred net loss of US$77m for CY09. Further, intangible assets on the books stand at US$28m as on 31st Dec 2009.
- Opto has indicated that it would turnaround the company in one year’s time without giving further details on the same pending the tender offer.
- About 80% of the consideration for this acquisition will be funded through debt which works out to be ~Rs3b. This will increase the interest cost for Opto substantially.
- We note that CSC had undertaken field corrective action of certain defibrillators and had initiated worldwide recall of ~12,200 automated external defibrillators due to some technical issues. The company has provided US$32m so far for the same. Also in 2008, the company had undertaken impairment of goodwill of US$108m due to overall downturn in the economy and resultant impact on the business.
We are awaiting further details from Opto’s management and place our rating Under Review pending further clarity.
Outlook & valuation (excluding CSC acquisition)
- Opto has delivered strong revenue and earnings growth over the last few years. Also, it has consistently maintained high return ratios.
- Further, despite rapid growth, the company still remains a marginal player in the global medical devices industry which gives Opto the opportunity to sustain its high revenue growth rate for the next few years.
- We believe Opto is likely to see strong growth in both the invasive and non-invasive businesses on the back of large market opportunity, expanding distribution network and geographical spread, new product launches and low base.
- Excluding the proposed CSC acquisition, we expect revenue CAGR of 23% over FY10-12 led by both non-invasive and invasive business segments. We estimate FY11 EPS at Rs18.4 (up 38.8%) and FY12 EPS at Rs22.6 (up 22.6%) leading to EPS CAGR of 30% over FY10-12.
- At current price, the stock trades at 16.5x FY11E and 13.5x FY12E earnings. Our estimates do not take into account the proposed CSC acquisition.
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