Tuesday, January 17, 2006

Boston Scientific (BSX)-Desperate Strategic Bid?

The battle for Guidant (GDT) is starting to reek. Boston Scientific (BSX) is becoming more creative in its financing, obtaining more support from Abbott (ABT) by selling it equity at $25 and raising $200 million more in debt financing, again from ABT.

The valuation of Guidant is becoming astronomical, at least from a conventional investment standpoint. GDT's EV has climbed to over $24.1 billion representing EV/Revenue of 6.55 times and EV/EBIT of 35.77 times based on trailing twelve months revenues and EBIT respectively. Compare this with Boston Scientifics' own valuation which is likely to get diminished by at least 5% this morning, EV/Revenue of 3.5 times and EV/EBIT of about 22 times.

The GDT board will have a tough time defending its approval of the JNJ deal. BSX offers higher growth, better valuation, more leverage to medical devices, and no exposure to patent expiration. BSX is competing with a company that generates $1.5 billion in FCF per quarter and has $7 billion in cash after paying down all debt.

BSX is very reliant on a single product line being the TAXUS stent which represents over 40% of sales and about half of earnings. If BSX succeeds in its pursuit of GDT, the revenue contribution of TAXUS would drop to 27% of revenues. Its exposure to the cardiac rhythm market of pacemakers and defibrillators would provide instant exposure to a rapidly growing field.

This grudge match between JNJ and BSX could ultimately lead to a direct offer to GDT shareholders with a hostile tender if the GDT board remains oblivious to BSX.

The ultimate winner in this battle may well be ABT which would gain exposure to GDT's vascular and endovascular businesses as well as equity exposure to BSX at a very reasonable valuation.


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