If I had to guess the sort of healthcare company that would get a premium acquisition offer, Lincare (Nasdaq:LNCR) would be low on my list, as relatively few buyers would want to pay a premium to get into a business that is beset by constant reimbursement pressures. But, as the old saying goes, you only need one buyer to make a deal and Lincare found that one.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

In a deal that reverses a spin-out from nearly 25 years ago, German industrial gases company Linde will be acquiring Lincare for $4.6 billion in total considerations. That works out to $41.50 per share for Lincare's shareholders; a 22% premium to Friday's closing price (which had been moving up on takeover rumors) and a whopping 67% premium to the stock's three-month average price.

SEE: Analyzing An Acquisition Announcement

What Is Linde Buying?
Linde is getting the nation's leading provider of in-home oxygen/respiratory therapy, with a national share of about 28%. Lincare has long been an exceptionally well-run company with strong management; management has built Lincare through a series of tuck-in acquisitions and has navigated the company through several challenging periods.

A lot of those challenges come from the nature of the business. Like home-care providers including Amedisys (Nasdaq:AMED) and LHC Group (Nasdaq:LHCG), Lincare gets a large amount of its revenue from the federal government - roughly 60% of the company's revenue comes from Medicare or Medicaid. With a large part of revenue subject to competitive bidding, a three-year limit on equipment rentals and ongoing rate cuts, the operating environment has been simply brutal of late.

SEE: Investing In The Healthcare Sector

And yet, Lincare has persevered. Lincare has managed to leverage its scale to drive down operating costs, and has repurchased roughly one-third of its shares over the past five years. At the same time, the company has tried to diversify away from its heavy dependence on oxygen therapy by building a specialty pharmaceutical business centered on anti-coagulation and pulmonary therapy.

Why Pay so Much?
To a certain extent, I can appreciate why Linde wants to expand its healthcare operations. The industrial gas business is very competitive and highly cyclical, and healthcare is a popular choice for companies looking to diversify (consider the example of Fujifilm). Moreover, other industrial gas companies like Air Products (NYSE:APD) and Praxair (NYSE:PX) have moved into the healthcare field to varying degrees (in fact, Linde bought Air Products' southern European healthcare business earlier this year).

SEE: Healthcare Funds: Give Your Portfolio A Booster Shot

All of that said, Linde is certainly paying a lot for this diversification. Lincare's market share is solid, and lends certain operating advantages, but it offers no respite to reimbursement pressures. Moreover, I find it hard to believe that there were competitive bidders forcing Linde to pay so much. As it stands, Linde is paying almost $10 (or 30%) more than I thought Lincare was worth, and the deal probably won't be materially additive until 2015 - and that's assuming there's no major downturn in reimbursement in the meanwhile.

The Bottom Line
Kudos to Lincare management for securing a great deal for its shareholders. To sell a Medicare-dependent business at a 25% premium to its all-time-high deserves more than just a pat on the back. Honestly, I cannot see why any Lincare shareholder wouldn't be thrilled with this deal.

I would not extrapolate this deal across the wider healthcare services group. True, there are quality names out there like AmSurg (Nasdaq:AMSG), Acadia Healthcare (Nasdaq:ACHC) and HCA (NYSE:HCA), and this bid from Linde proves that there's always a chance for a premium bid, but I just don't see a surplus of buyers willing to pay such high premiums today.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    The 5 Best Dividend Stocks in the Healthcare Sector

    Learn about the top five dividend stocks of companies operating in the health care sector that generate substantial cash flows to afford high payouts.
  2. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  3. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  4. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  5. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  6. Stock Analysis

    An Auto Stock Alternative to Ford and GM

    If you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
  7. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  8. Stock Analysis

    The Biggest Risks of Investing in Netflix Stock

    Examine the current state of Netflix Inc., and learn about three of the major fundamental risks that the company is currently facing.
  9. Stock Analysis

    What Seagate Gains by Acquiring Dot Hill Systems

    Examine the Seagate acquisition of Dot Hill Systems, and learn what Seagate is looking to gain by acquiring Dot Hill's software technology.
  10. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  1. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
  2. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>
  3. How do I use discounted cash flow (DCF) to value stock?

    Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>
  4. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  5. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  6. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!