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. Economics

    Investing Opportunities as Central Banks Diverge

    After the Paris attacks investors are focusing on central bank policy and its potential for divergence: tightened by the Fed while the ECB pursues easing.
  2. Stock Analysis

    The Biggest Risks of Investing in Pfizer Stock

    Learn the biggest potential risks that may affect the price of Pfizer's stock, complete with a fundamental analysis and review of other external factors.
  3. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  4. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  5. Markets

    PEG Ratio Nails Down Value Stocks

    Learn how this simple calculation can help you determine a stock's earnings potential.
  6. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  7. Investing

    What’s the Difference Between Duration & Maturity?

    We look at the meaning of two terms that often get confused, duration and maturity, to set the record straight.
  8. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  9. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  10. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  1. What does low working capital say about a company's financial prospects?

    When a company has low working capital, it can mean one of two things. In most cases, low working capital means the business ... Read Full Answer >>
  2. Do nonprofit organizations have working capital?

    Nonprofit organizations continuously face debate over how much money they bring in that is kept in reserve. These financial ... Read Full Answer >>
  3. Can a company's working capital turnover ratio be negative?

    A company's working capital turnover ratio can be negative when a company's current liabilities exceed its current assets. ... Read Full Answer >>
  4. Does working capital measure liquidity?

    Working capital is a commonly used metric, not only for a company’s liquidity but also for its operational efficiency and ... Read Full Answer >>
  5. 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 >>
  6. 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 >>

You May Also Like

Trading Center