Abbott eases its M&A risk with $4.3 bln asset sale

September 19, 2016

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

Abbott Laboratories may have eased the flow of its merger pipeline. The $62 billion health firm is selling its eye-surgery unit to Johnson & Johnson for $4.3 billion. With two acquisitions worth over $30 billion pending – and the purchase of Alere, in particular, not going smoothly – it’s a sensible way to gain some breathing room.

Abbott arguably bit off more than it could chew when it agreed to purchase diagnostic company Alere for a pricey $5.8 billion in February and then St. Jude Medical for a chunky $25 billion just two months later. In the wake of agreeing to its sale to Abbott, Alere failed to file financial statements, announced a product recall, and acknowledged multiple probes into billing and foreign sales practices.

The relationship turned acrimonious. Alere said Abbott was dragging its feet in seeking needed regulatory approvals, while Abbot claimed Alere was hindering attempts to find necessary information. Moreover, Abbott’s travails left investors jittery about its M&A intentions.

A claim by short-seller Muddy Waters in late August that St. Jude’s cardiac devices were hackable, with potentially fatal results, hit St. Jude’s shares severely and dented Abbott’s. Such worries have been making the rounds for more than a decade and so far seem more Hollywood plot than reality. St. Jude has sued Muddy Waters, but a certain amount of damage has been done.

Abbott’s sale, announced on Friday, should help things go more smoothly. Abbott had said it would sell $3 billion of stock to help finance its two acquisitions. The asset disposal will give it more cash to play with, even after taxes. Abbott’s credit rating will still probably get whacked as completing both deals will approximately triple its debt. But the extra cash means it can either avoid issuing shares or make the credit-rating hit less bad.

Moreover, the deal may give Abbott more sway in arbitration with Alere. It weakens the latter’s claim that Abbott’s strained finances make it unwilling to complete the acquisition. Maybe Abbott can now afford to do the deal at a lower price, bolstering its reputation as an acquirer while reflecting Alere’s troubles. Better yet would be for Abbott to take its time checking out its targets before signing deals. That’s something the latest asset sale can’t help with.

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