Danaher Corporation (NYSE:DHR) could have some interest, particularly given the rich cash flow characteristics of the transfusion business, but again there are overlaps in immunoassay and clinical chemistry that could reduce the leverage from a deal. There’s also a question of Danaher Corporation (NYSE:DHR)’s competing priorities including the dental business; nearly half of Danaher Corporation (NYSE:DHR)’s revenue comes from health care and life sciences; and management seems reluctant to overweight the business in any one direction. Moreover, while the company has billions of dollars in “dry powder” and hasn’t done a large deal in a while, product ID and automation seem to be the areas Danaher Corporation (NYSE:DHR) is most interested in building through deals.
General Electric Company (NYSE:GE) is a more interesting case. General Electric Company (NYSE:GE) has made it known that the company would be open to expanding beyond its traditional “Big Iron” diagnostics and imaging operations, and the company did buy cancer diagnostics company Clarient almost three years ago. Moreover, General Electric Company (NYSE:GE) once thought it had a deal to acquire Abbott Laboratories (NYSE:ABT)’s diagnostics business many years ago. J&J’s OCD may be more of a fixer-upper than General Electric Company (NYSE:GE) typically likes to buy, but GE already has a presence in selling big-ticket capital equipment to hospitals around the world, and the addition of a potentially margin/cash-flow rich stream of recurrent consumables would fit the General Electric Company (NYSE:GE) model.
So, who is left? Mindray and Qiagen might like the idea of owning J&J OCD, but the rumored purchase price roughly matches their current market capitalizations. Likewise, Sysmex would find it to be a stretch. Sony and Samsung are not names that normally spring to mind when thinking about medical technology, but both have made it clear that they wish to diversify into health care and J&J OCD has the sort of global presence that could facilitate such a strategy.
The bottom line
Even though Johnson & Johnson (NYSE:JNJ)’s OCD business saw sales fall about 4% in 2012 and another 6% in the second quarter of this year, I still do believe it is quite probable that the company will get its reportedly targeted multiple of 2.5 times trailing sales, or about $5 billion in cash. Once the deal is done, I would expect that the cash will go toward the previously announced share buyback, though I wouldn’t rule out a deal in medical devices as I outlined earlier.
Looking across the industry, though, I think the possibilities of a strategic sale are limited, with General Electric Company (NYSE:GE), BD, Danaher Corporation (NYSE:DHR), and perhaps Sysmex as the most likely interested parties. With that, I expect a financial buyer to emerge with the winning bid, though that would mostly likely just start the clock on an eventual IPO or sale to a strategic buyer.
The article Johnson & Johnson Looks to Turn the Fading Ortho Diagnostics Unit Into Cash originally appeared on Fool.com and is written by Stephen D., Simpson.
Stephen D. Simpson, CFA owns shares of Roche. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of General Electric Company and Johnson & Johnson.
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