Late last year, Abbott first approached St. Jude Medical about its serious interest in acquiring the company. After months of negotiations, the sides agreed on a deal, which was announced on April 28.
If approved by shareholders and regulatory authorities, a combination of Abbott and St. Jude Medical would trail only Medtronic in terms of cardiovascular sales among medical device manufacturers.
Abbott agreed to pay $25 billion for St. Jude Medical. St. Jude shareholders will receive $46.75 in cash and 0.8708 shares of Abbott common stock.
During a conference call with analysts two hours after the acquisition was announced, Abbott CEO Miles White again denied a Financial Times report from August that mentioned Abbott was interested in St. Jude Medical.
“At the time last summer when the rumor popped in the morning, there was absolutely no truth to the rumor and no communication between the companies, nothing,” White said. “At that time, the rumor was absolutely false and that’s what we said.”
White said that the combined company would have more than $8 billion in annual cardiovascular sales, which he expects to grow in the mid-single digits in terms of revenue each year. He added that the cardiovascular device market represents a potential $30 billion opportunity. If the St. Jude Medical deal is approved, White said Abbott would be the top seller in coronary stents and second in cardiac rhythm management. It would also have leading positions in high-growth areas such as atrial fibrillation, structural heart and heart failure.
“With a leading portfolio of products that target high growth therapy areas, St. Jude is well positioned to grow sales at a level on par with Abbott’s growth rate,” White said. “And when combined, our highly complementary medical device portfolios will be significantly more competitive together than either is alone.”
When an analyst asked White if Abbott could eventually spin off its medical device business, White laughed and dismissed the notion.
“I don’t think you should view this as a two-step process,” White said. “I think the step today was a pretty big step. We’re gonna have an awful lot of integration and debt reduction and so forth to do here. I think right now you should be anticipating the integration of St. Jude and the performance of the company overall going forward as a healthy growth company in the healthcare space.”
Abbott chief financial officer Brian Yoor said the company expects the deal to close in the fourth quarter of 2016 and be accretive to Abbott’s adjusted earnings per share in the first full year after closing. Abbott anticipates 21 cents of accretion in adjusted earnings per share in 2017 and 29 cents of accretion in 2018 and annual pre-tax synergies of $500 million by 2020.
Abbott plans on assuming or re-financing St. Jude Medical’s net debt, which is currently at $5.7 billion, according to Yoor. He said that Abbott would “significantly reduce” its share repurchases but would eventually issue $3 billion of common stock in the secondary market to re-balance its capital structure.
“Although modestly dilutive to Abbott’s adjusted earnings per share, this issuance provides important financial flexibility and liquidity to achieve our broader business objectives,” Yoor said.
Abbott’s and St. Jude Medical’s boards of directors have already approved the deal. However, St. Jude Medical’s shareholders must approve the transaction, which is also subject to customary closing conditions.
As of 3:00 p.m. Eastern time on April 28, Abbott’s shares were down approximately 7 percent since the St. Jude Medical deal was announced earlier in the day. White, though, was confident now was the best time to make the acquisition.
“If you look at the changes in the healthcare landscape, which I know you must track every day, it becomes increasingly compelling that the two companies together are much more competitive than apart,” White said. “If anything’s changed, it’s the nature of the healthcare system broadly and how customers select products, select companies that they want to work with. They obviously want to work with two or three companies, but not many. A company that has a much broader product offering, has a much larger presence in an account and a much larger presence product-wise, brand-wise, reps, support, all those things. At the end of the day you finally say, ‘OK, it’s a compelling time to put this together.’”