There seems to be no end to mergers and acquisitions in the US Healthcare sector with the latest one being between Becton, Dickinson and Company ( BDX ) and San Diego-based CareFusion Corporation ( CFN ).
Medical technology firm, Becton, Dickinson recently agreed to buy CareFusion for $12.2 billion in cash and stock, to provide a full range of medical products to hospitals. The agreement is expected to close in the first half of next year and make the acquirer one of the five largest medical device companies in the world.
The news was well received by the market, as Becton shares jumped 7.7% and CareFusion surged 23% following the deal announcement (read: Healthcare ETFs for your Portfolio's Wellness ).
Becton, Dickinson will pay a total of $58.00, comprising $49.00 in cash and 0.0777 of a share of Becton, Dickinson for each share of CareFusion. This represents 26% premium based on CareFusion's closing price on Friday.
Becton, Dickinson manufactures products required to deliver and administer drugs like syringes and catheters, while CareFusion makes products to store and deliver drugs, such as pumps. Hence, the combined entity will be able to provide a broad range of supplies, improve quality of care, efficiency as well as reduce healthcare costs.
Moreover, the deal is expected to provide $250 million of pre-tax cost synergies to Becton, Dickinson, including savings from the merger that are expected to be fully realized in fiscal 2018.
The deal marks the latest multibillion-dollar healthcare sector deal. A few months backs the second largest U.S. medical device manufacturer Medtronic ( MDT ) had agreed to buy Irish rival Covidien ( COV ) for $42.9 billion. However, the deal has come under scrutiny as it was primarily aimed at avoiding higher tax rates and U.S. officials are also trying to crackdown on such deals aimed at "tax inversion" (read: Medical Device ETF in Focus as Medtronic Buys Covidien ).
However, the recent deal between Becton, Dickinson and CareFusion is unlikely to raise alarms as far as tax inversion is concerned as both companies are based outside the U.S.
Nonetheless, the deal brings these two stocks and the medical device ETF - iShares U.S. Medical Devices ETF ( IHI ) - in focus. Investors should keep a close watch on this ETF to ride potential gains from the acquisition news.
IHI in Focus
IHI provides a targeted exposure to the U.S. medical device sector by tracking the Dow Jones U.S. Select Medical Equipment Index. The fund manages an AUM of $730 million and trades in light volumes of roughly 60,000 shares a day.
The fund holds a small basket of 50 stocks which is quite concentrated on its top 10 holdings. Becton, Dickinson scores among the top 10 holdings with 4.5% allocation, while Carefusion Corp has 2.3% weight in the fund.
Medtronic Inc, Abbott and Thermo Fisher form the top three spots having a combined exposure of more than one-fourth of fund assets. The product has a definite tilt toward large cap securities with 69% of assets, followed by 16% in mid caps and the rest in small caps.
Sector-wise, Medical Equipment occupies the bulk of the exposure with three-fourths allocation, followed by 14% allocation to Medical Supplies and 10% allocation to Pharmaceuticals (see: all the Healthcare ETFs here ).
IHI charges a reasonable 43 basis points as expenses. The product has a modest dividend yield of 0.62% but has a good performance record. IHI has returned 10% in the year-to-date frame, 21% in the past one year and a compounded 84% in the past three years.
The fund currently has a Zacks ETF Rank of 2 or 'Buy' rating with Medium risk outlook, suggesting room for upside (read: Bet On This Top Ranked Medical Device ETF ).
Though the deal between the two companies is expected to be highly beneficial to both the medical equipment makers, some of the credit rating agencies have raised a red flag on the deal. To complete the deal, Dickinson received a $9.1 billion bridge loan from Goldman Sachs and plans to take a permanent loan at the deal's closing.
However, Moody's believe that the bond financing will increase the company's debt burden and has thus put Becton, Dickinson's ratings on review for downgrade after the acquisition news.
Nonetheless, given the surge in M&A activity in the healthcare space, IHI may be a good bet to tap the opportunities in this field.