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Thermo Fisher Pays A High Price For Quality
Dionex (Nasdaq:DNEX) was on a lot of short-lists for potential life sciences M&A, and Thermo Fisher (NYSE:TMO) made that prediction a reality on Monday morning. Thermo Fisher, a large and diversified life sciences company announced that it was acquiring Dionex for $2.1 billion.
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Quality Does Not Come Cheap
Thermo Fisher is acquiring all of Dionex for $2.1 billion in cash, or $118.50 per share. That is a 21% premium to Dionex's price on Friday, and a healthy multiple for this niche company. Thermo is paying nearly five times trailing revenue and 20 times trailing EBITDA. That is well ahead of the current valuations for other niche analytical companies like Bruker (Nasdaq:BRKR), broad analytical companies like Agilent (NYSE:A), Waters (NYSE:WAT) and PerkinElmer (NYSE:PKI), and the acquiring company. In fact, investors pretty much have to turn to companies like Illumina (Nasdaq:ILMN) or Luminex (Nasdaq:LMNX) to see comparable valuations.
By the same token, there are plenty of reasons that validate that price tag. Dionex is one of the best companies in the sector in terms of ROIC and margins, and management have been very sound stewards of the company's capital. Where many companies fall all over themselves in trying to diversify and become a one-stop-shop for life sciences, Dionex has more or less stuck its specialty. That has allowed the company to build a 75% share in ion chromatography, while also building a decent (though small) high-performance liquid chromatography business.
Thermo Buys into Interesting Markets
So why would Thermo want to do this deal? First, there is the installed base of approximately 22,000 ion chromatography systems around the world with Dionex's name on them. Moreover, Dionex has sizable exposure to China and other emerging markets (about one-third of revenue), as well as getting about half of its business from the water testing market - a market with high barriers to entry and even higher reluctance on the part of customers to change vendors. Of course, there is also that market share - 75% share in the ion chromatography business is nothing to sneeze at, and rivals like MetrOhm and Shimadzu have pretty much always been playing catch-up.
While this deal will not come close to unseating Waters, Agilent, or Shimadzu in the HPLC industry, it nevertheless improves Thermo's analytical business and adds scale and technology to the business. Moreover, Dionex has been a consistent free cash flow generator, and that will fit in well with its new parent (that enjoys a similar reputation), as well as easing investor concerns about how Thermo was going to deploy capital.
Different Kinds of Value
Dionex is a good example of how investors can sometimes find value where the numbers may not suggest there is any. Going back to my time as an analyst, Dionex has never really had much sell-side coverage, and yet the stock was seldom cheap by conventional metrics. What casual observation does not reveal, though, is that high market share in worthwhile but difficult-to-penetrate markets. What Dionex offered, then, was a "heads you win, tails you win" type of set-up where the company was a probable M&A target, but still an attractive stock even if it continued operating independently.
The Bottom Line
For Thermo investors, maybe this is a step towards the Street giving the company a bit more credit (and valuation). This deal is accretive use of capital that brings in good technology and gives the company some attractive and defensible new markets. Thermo is not likely to ever be a break-out growth story again, but investors could do a lot worse in terms of finding a solid long-term play on the ongoing growth of life sciences and analytical equipment. (For related reading, take a look at The Ups And Downs Of Biotechnology.)
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IN PICTURES: Baby Buffett Portfolio: His 6 Best Long-Term Picks
Quality Does Not Come Cheap
Thermo Fisher is acquiring all of Dionex for $2.1 billion in cash, or $118.50 per share. That is a 21% premium to Dionex's price on Friday, and a healthy multiple for this niche company. Thermo is paying nearly five times trailing revenue and 20 times trailing EBITDA. That is well ahead of the current valuations for other niche analytical companies like Bruker (Nasdaq:BRKR), broad analytical companies like Agilent (NYSE:A), Waters (NYSE:WAT) and PerkinElmer (NYSE:PKI), and the acquiring company. In fact, investors pretty much have to turn to companies like Illumina (Nasdaq:ILMN) or Luminex (Nasdaq:LMNX) to see comparable valuations.
By the same token, there are plenty of reasons that validate that price tag. Dionex is one of the best companies in the sector in terms of ROIC and margins, and management have been very sound stewards of the company's capital. Where many companies fall all over themselves in trying to diversify and become a one-stop-shop for life sciences, Dionex has more or less stuck its specialty. That has allowed the company to build a 75% share in ion chromatography, while also building a decent (though small) high-performance liquid chromatography business.
So why would Thermo want to do this deal? First, there is the installed base of approximately 22,000 ion chromatography systems around the world with Dionex's name on them. Moreover, Dionex has sizable exposure to China and other emerging markets (about one-third of revenue), as well as getting about half of its business from the water testing market - a market with high barriers to entry and even higher reluctance on the part of customers to change vendors. Of course, there is also that market share - 75% share in the ion chromatography business is nothing to sneeze at, and rivals like MetrOhm and Shimadzu have pretty much always been playing catch-up.
While this deal will not come close to unseating Waters, Agilent, or Shimadzu in the HPLC industry, it nevertheless improves Thermo's analytical business and adds scale and technology to the business. Moreover, Dionex has been a consistent free cash flow generator, and that will fit in well with its new parent (that enjoys a similar reputation), as well as easing investor concerns about how Thermo was going to deploy capital.
Different Kinds of Value
Dionex is a good example of how investors can sometimes find value where the numbers may not suggest there is any. Going back to my time as an analyst, Dionex has never really had much sell-side coverage, and yet the stock was seldom cheap by conventional metrics. What casual observation does not reveal, though, is that high market share in worthwhile but difficult-to-penetrate markets. What Dionex offered, then, was a "heads you win, tails you win" type of set-up where the company was a probable M&A target, but still an attractive stock even if it continued operating independently.
The Bottom Line
For Thermo investors, maybe this is a step towards the Street giving the company a bit more credit (and valuation). This deal is accretive use of capital that brings in good technology and gives the company some attractive and defensible new markets. Thermo is not likely to ever be a break-out growth story again, but investors could do a lot worse in terms of finding a solid long-term play on the ongoing growth of life sciences and analytical equipment. (For related reading, take a look at The Ups And Downs Of Biotechnology.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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