Analysis: GE DHR

Early Monday morning, we were greeted with the fantastic news that General Electric (GE) agreed to sell its BioPharma business of GE Life Sciences to Danaher (DHR) at a cash purchase price of approximately $21.4 billion. We've written before in our Alert here that Danaher could be in play for GE's Life Sciences assets, and we are thrilled to see this win-win deal come to fruition. At about 17x estimated 2019 EBITDA, the purchase price looks more than reasonable for the long-term outlook of the assets, and in a research note, Evercore ISI analyst Ross Muken said the deal "is likely to be a multi-year home run" for Danaher.

For Danaher, management adds a fast-growing, leading provider of instruments consumables, and software that sells to both the upstream and downstream product line of bioprocessing. The business' products touch multiple workflows of biopharmaceutical drugs, including research, discovery, process development, and manufacturing. The revenue mix is compelling at 75% consumable/25% equipment, meaning that a large part of sales is considered recurring in nature. This business will run as a stand-alone operating company within Danaher's high growth Life Science division, which itself delivered +7.5% core sales growth in the fourth quarter of 2018. Danaher's press release on the transaction can be found here.

Source: Company Presentation

For GE, management cashes out on the valuable part of its Healthcare portfolio and will be able to use the proceeds to reduce leverage and improve the balance sheet. Also, this deal ends GE's pursuit of its previously planned Healthcare IPO, which one could surmise would have stolen investment dollars from DHR. The market's reaction to deal is favorable on both sides and both company's shares were rising this morning.

In the press release, Danaher President and CEO Thomas Joyce, Jr., said, "GE Biopharma is renowned for providing best-in-class bioprocessing technologies and solutions. This acquisition will bring a talented and passionate team as well as a highly innovative, industry-leading product suite to our Life Sciences portfolio, providing an excellent complement to our current biologics workflow solutions."

"We expect GE Biopharma to advance our growth and innovation strategy in an important and highly attractive life science market," he added. "We see meaningful opportunities to harness the power of the Danaher Business System to further provide GE Biopharma's customers with end-to-end bioprocessing solutions that help enable breakthrough development and production capabilities. We look forward to welcoming this talented team to Danaher."

This transaction also acts as a continuation of Danaher's multi-year transformation towards Life Sciences, which is the strongest part of the business. Taking a step back, in 2015 Danaher made a huge acquisition in Pall Corporation. Pall's filtration business is expected to fit nicely with GE's chromatography business, according to Credit Suisse, who wrote this morning that they see a "meaningful strategic fit" between the two. Then in 2016, the company shed several Industrial-based assets in the Fortive spin. And to get its portfolio even more focused around Life Sciences and its high-growth areas, Danaher announced last July its plans to divest the underperforming Dental business. This GE deal will impact the structure of this divestiture (change from a spin to an IPO) but its timing is still on track for mid-to late second half 2019. With Dental gone, we expect the less-cyclical Danaher to command a higher market multiple.

As you can see in the company's slides below (full slide deck here), the strategic rationale and the financial implications are very, very favorable. The credible Danaher management team expects the deal to reduce GAAP diluted net earnings per share by approximately $1.15 to $1.20, but it will be highly accretive to non-GAAP adjusted diluted net earnings per share to the tune of $0.45 to $0.50 in the first full year post acquisition. In appreciation of the size of this deal, that accretion is roughly 9% of what Danaher was previously expected to earn in 2020, which would be the first full year after anticipated closing date. By Year 5, Danaher believes this business will generate more than $1.00 in earnings power.

Source: Company Presentation

Source: Company Presentation

Overall, this was a fantastic outcome for both companies. We give credit to both management teams for nailing down a deal that benefits both sides: Danaher doubles down on its pursuit of becoming a Life Sciences company, and GE moves forward in its goal to clean up the balance sheet.

Lastly, our price target will be revised (upwardly) to account for this game-changer of a deal. Investors are going to want to be invested in this re-designed Danaher, and we can easily see shares up $10 today alone.