Espicom View: A potential break-up of Smiths Group has reportedly been on the cards for a long time. However, management has always been able to resist such pressure to shed the Medical division because of its ability to deliver sustained revenues. Despite this, the appointment of a Chief Executive Philip Bowman, who has a history of breaking up businesses and selling companies, seems to have encouraged the latest bidder to make its move. Previous unsuccessful bids for Smiths Medical have been rumoured to come from Apax Partners, a UK private equity group, as well as other private equity groups, but talk also switched to rivals in the industry, including the possibility of Baxter, Covidien, GE Healthcare and Johnson & Johnson entering the fold. It could be that one of these parties has made a second acquisition attempt.
Following media speculation, the Board of Directors at London, UK-based Smiths Group has confirmed that it has received a preliminary approach for the purchase of Smiths Medical. Although Smiths Group did not provide any further details, it did state that discussions are currently at an early stage and a further announcement will be made as appropriate.
Based in Minnesota, US, Smiths Medical is a leading provider of interventional medical devices for the hospital, emergency, home and specialist environments. Its products are used during critical and intensive care, surgery, pre- and postoperative care, and in a series of high-end home infusion therapies. The company also offers products for veterinary and industrial use. In relation to Smiths Group, Smiths Medical contributed 28 per cent of the group's total revenues in FY2012 (ended 31st July 2012), behind group leader John Crane. Up until FY2011, Smiths Medical was the largest division of Smiths Group.
Smiths Group remains one of the last significant remaining conglomerates left in the UK and its Medical division has long been seen as a candidate for a spin-off or disposal. In recent times, such talk has intensified as the division has been restructured and revived. In January 2011, Smiths Group rejected a US$2.45 billion offer for Smiths Medical from an undisclosed suitor. The group turned down the "best and final" offer and stated that it would not be in the interests of shareholders to pursue discussions on the basis of an indication "at this price level".
In the nine months to 4th May 2013, Smiths Medical sustained underlying revenue growth from the first half into the third quarter, driven by both single-use consumables and hardware sales. Around half of the growth came from emerging markets, reflecting increased investment in sales and marketing in these high growth regions. Headline operating profit in the first nine months lagged compared with the prior year period as a result of the additional investment in emerging markets. In addition, the introduction of the US medical device tax in January also affected profitability. Looking to the full year (ending 31st July 2013), revenue growth for Smiths Medical is expected to continue, driven by emerging markets and new products. Operating margins will reduce compared with the prior year as a result of the device tax and increased investment. However, the business is partially offsetting this through operational improvements.
Smiths Medical has been and remains an attractive business. Targeting emerging markets, as well as possessing a strong product portfolio and a promising pipeline, and the division's 2009 decision to exit the diabetes market, which was an unsustainable source of growth for the company, Smiths Medical would be a safe and valued investment for the right buyer.