OK, so maybe Abbott Laboratories (ABT) isn’t acquiring St. Jude Medical (STJ) after all. All the same, maybe it should at least consider doing so. It would be a good fit, and there’s little else Abbott Labs could do with its cash hoard right now that would prove as fruitful.
It begs the question, what would a combination of St. Jude Medical and Abbott Labs have looked like?
If anything, it’s an idea worth pondering for STJ and ABT owners, if only because such a merger still can’t be entirely ruled out.
No, We’re Not Interested in St. Jude Medical
If the last word you read regarding St. Jude Medical and Abbott Labs was this morning’s report from the Financial Times (which has since been updated) that ABT was preparing a $25 billion bid for the former, then know that the rumor has since been dispelled.
And yes, the 13% premarket gain from STJ has also been reeled in to a 4% gain as of early afternoon trading, though the stock’s still basking in a wave of bullishness.
In its defense, the Financial Times article warned investors that no bid had been put on the table, and still may not. Nevertheless, the FT write-up leaned heavily on the presumptuous side of the rumor, citing “people familiar with the matter” as the peg for the story.
It only took Abbott Labs a little less than an hour to quell the rumor, making it clear it wasn’t preparing any such offer for STJ.
ABT and STJ Wouldn’t Be a Bad Fit
While the deal won’t be happening after all — at least not yet — of all the rumors the financial media could stir up, a pairing of STJ and ABT actually makes a lot of sense.
Abbott Labs, though it’s recently shed its foreign developed-markets generic drug business to Mylan (MYL), is still a highly diversified healthcare conglomerate, with products including: the nutrition drink Ensure, the Armada heart catheter, Lasik machines, the FreeStyle device for diabetics and a wide array of pharmaceuticals.
While each division comprises a fair chunk of the company’s overall business, its vascular products revenue takes up the least space. During the first half of the year, vascular products only generated $1.42 billion worth of revenue for ABT, or 16% of the $8.95 billion worth of reported segment revenue.
Translation: There’s room for growth in that arena.
As it turns out, St. Jude Medical is neck deep into the cardiovascular market. St. Jude offers pacemakers, mechanical heart valves, heart-surgery guidewires and dozens of other vascular and cardiologic products.
Translation: If Abbott wanted to take on some high-quality exposure to a market where it’s underrepresented, an acquisition of St. Jude Medical would be the way to do so. There’s also no issue of affordability.
Although STJ may not qualify as a high-growth stock, St. Jude Medical is a reliable cash-cow. Last year, STJ turned $5.6 billion worth of sales into net income of $1 billion, and that was a fairly typical year for the organization. Plus, priced at only 20 times its trailing twelve-month earnings, STJ shares aren’t priced at levels that would give ABT shareholders a reason to balk — it could be fairly self-funding.
Abbott also has more than $11 billion in cash and near-cash holdings on the books, and could easily come up with the rest to facilitate such a deal. Even the $25 billion price the Financial Times implied would be palatable to people on both sides of the table.
Bottom Line for Abbott Labs
Though the acquisition news was little more than a rumor this time around, never say never. The two organizations would be a good fit.
Giving credit where it’s due, Gabelli fund manager Jeff Jonas saw the potential upside of this pairing back in May, saying:
“The one I dream about is for them to buy St. Jude … There are a ton of synergies and you could make it work.”
Jonas believes a union of the two companies would give Abbott the cardiovascular products it needs to become an anchor in that piece of the healthcare market. It has already got the name and sales experience.
In other words, Abbott Labs would be wise not to close the door on the idea forever just because the premise has been made public.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
