Pure play gets new spin in filter maker M&A

May 13, 2015

The author is a Reuters Breakingviews columnist. The opinions expressed are his own. 

Talk of a $13 billion takeover of Pall puts a new spin on pure play. The largest publicly traded air and water purification specialist is up for sale in an auction that could attract interest from the likes of U.S. healthcare conglomerate Danaher and instrument maker Thermo Fisher Scientific, according to the Wall Street Journal. The speculated price is punchy, and cost cuts might not cover the premium. But Pall’s scarcity value, profitability and burgeoning biotech customer base make it a tempting target.

Pall’s custom filtration systems are used in everything from food and beverage production to semiconductor manufacturing. Pharmaceuticals offer the big growth opportunity, though.

Picture vats full of Chinese hamster ovary cells churning out custom-engineered proteins used to treat disease. Pall provides the apparatus that separates the drugs from the rest of the gunk in the tank. It also sells the replaceable filters, which is where the real money is. It’s a biotech twist on Gillette’s classic razor-and-blades strategy that keeps gross margins above 50 percent.

The fast-growing biopharmaceuticals market should account for nearly 60 percent of Pall’s operating profit by 2020, according to Cowen, up from about half of last year’s $517 million of earnings before interest and tax. Pall also has a reputation for keeping costs under control.

It’s an attractive combination that helps explain why it might be able to squeeze out such a good price. A $13 billion sale would value the enterprise at 18 times expected earnings before interest, taxes, depreciation and amortization over the next 12 months. That’s above the average 15 times EBITDA struck for similar transactions in life sciences going back more than a decade, according to Jefferies.

A buyer could perhaps siphon off $275 million of unneeded costs within three years, Jefferies analysts reckon. At 8 percent of Pall’s estimated 2018 sales, that’s pretty chunky. At best, though, those are currently worth around $1.7 billion to shareholders, once taxed, capitalized and discounted. That’s not enough to cover the 23 percent premium to Pall’s $10.6 billion market capitalization before the Journal broke the story. The desire to secure such purity, though, may make Pall too tempting a target.

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