Deal machine beats PE barons to $5.8 bln deal

February 7, 2011

By Lisa Lee
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Danaher has snatched medical group Beckman Coulter for $5.8 billion, out-bidding buyout firms in the process. It shows that despite relatively easy credit, private equity isn’t the only acquirer that can pay up. But the historically acquisitive Danaher isn’t your typical strategic buyer, either.

With private equity for competition, Danaher wasn’t going to nab Beckman on the cheap. Big name buyout consortiums were involved, according to news reports, including a Blackstone Group and TPG combo and another team of Apollo Global Management and Carlyle Group. These folks these days can borrow as much as six times a target company’s EBITDA, or maybe even seven times.

That’s why Danaher is forking over a 45 percent premium to Beckman’s undisturbed market value back in December. Despite that, though, the deal works — a lesson in how a different kind of buyer can sometimes win auctions. Danaher isn’t quite the traditional strategic player. Over the years, it has collected a big portfolio of companies in all kinds of industries, from microscopes to network analyzers to hand tools. Though all far smaller than the Beckman deal, it has made more than 50 acquisitions since 2007. That suggests financial engineering skills alongside a strategic interest in Beckman.

Here’s how the numbers stack up. New and assumed debt will account for about 60 percent of the deal’s enterprise value of $6.8 billion. With relatively little debt on its balance sheet, Danaher can afford to borrow more. It will pay for the rest with cash and by selling some new equity, helping to maintain its credit rating and flexibility to do other deals.

So far, so good — but it’s hard to see how Danaher could have beaten off more highly-leveraged buyout barons. Synergies with the company’s existing businesses make the difference. After tax at Danaher’s recent rate of around 20 percent, these have a present value of around $2 billion. That more than covers the deal premium of about $1.8 billion. Together with a purchase of a company at a lower valuation multiple than its own — roughly eight times forecast EBITDA for Beckman this year, against 11 times for Danaher — that means the buyer will see increased earnings without having given away the farm on price. No wonder investors took the unusual step of giving the acquirer’s shares a boost as well as the target’s.

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