By: Patrick Gorton, Shivaum Bapu, Gurneek Gill (UCL) and Roshni Padhi, Amarins Laanstra-Corn (Stanford)
Overview of the deal
Acquirer: Siemens Healthineers
Target: Varian Medical Systems
Total Transaction Size: $16.4 Billion
Closed date: Expected first half of 2021
Target Advisor: Goldman Sachs
On August 2nd, 2020, Siemens Healthineers agreed to buy Varian Medical Systems in a deal that values the US maker of devices and software for cancer treatments at $16.4bn in the biggest medical acquisition of the year. The German medical technology company offered $177.50 a share for the California-based business; a 24% takeover premium.
The deal would give Siemens a sizable market share in the rapidly growing field of cancer treatment where it has little presence currently, giving the deal clear strategic rationale. The purchase is expected to have a positive effect on EPS within the first 12 months of the closing.
Healthineers will finance the acquisition through a $17.9bn bridge loan from Siemens AG. That will eventually be refinanced by a share sale by Healthineers with Siemen’s stake in the firm declining to 72% from 85%.
‘‘The deal is a leap in the fight against cancer and a leap in our overall impact on healthcare. The combination means more effective and efficient medical care.’’ Bernd Montag, Siemens Healthineers CEO.
Company Details: Siemens Healthineers
Siemens Healthineers, the healthcare division under Siemens AG, was founded in Erlangen, Germany in 1847. Rebranded from Siemens Healthcare in 2016, Siemens Healthineers has become one of the leading providers in healthcare and medical solutions for the 21st century. As the parent company for smaller medical technology subsidiaries, their portfolio has grown to include imaging and diagnostic equipment, disease testing, advanced therapies, and service platforms for healthcare management. In previous years Siemens Healthineers has successfully publicly acquired nine corporations, with products ranging from fertility treatments and ultrasound imaging systems to molecular testing equipment. In Siemens Healthineers’ mission of “expanding medical precision, transforming delivery care, and digitalizing healthcare,” the corporation has gone on to develop over 18,00 patents and hire over 50,000 employees in 70 countries.
Founded in 1847 and headquartered in Erlangen, Germany
CEO: Bernd Montag
President: David Pacitti (North America)
Number of Employees: 54,100
Market Cap: $48.34bn
LTM Revenue: $14.96bn
LTM EBITDA: $3.0bn
LTM EV/Revenue: 2.72x
LTM EV/EBITDA: 13.55x
Company Details: Varian
Varian Medical Systems is a California based software maker, specialising in radiation oncology treatments. Varian has produced several medical devices such as linear accelerators making them pioneers in the treatment of cancer and in addition to this they have designed software to treat other medical conditions. Moreover, the firm supplies tubes and digital detectors for X-ray imaging across a wide range of fields including veterinary medicine and security. With over 7100 employees and over 70 sites globally, Varian Medical Systems is a big player in their field.
Founded in 1948 and headquartered in Palo Alto, California
President & CEO: Dow R. Wilson
Number of Employees: 10,062
Market Cap: $15.87bn
LTM Revenue: $3.2bn
LTM EBITDA: $580.5m
LTM EV/Revenue: 4.86x
LTM EV/EBITDA: 27.03x
The acquisition is expected to be accretive to Siemens Healthineers within 12 months of closing. The deal builds on a pre-existing relationship between Siemens Healthineers and Varian, who have worked together for more than a decade in areas such as radiotherapy diagnostics and medical imaging for treatment planning. In addition to tapping into Varian’s superior market share in North America, Europe, and China, the deal allows Siemens Healthineers to fully capitalize upon Varian’s software capabilities by essentially doubling their current imaging IT software business. In fact, Varian’s software business is valued just short of $600 million with an 18% YoY growth rate as of fiscal year 2019, which will be helpful to Siemens Healthineers as technology-enabled and technology-focused businesses continue to fare better during the pandemic. This is crucial given that Siemens Healthineers faced a revenue decline of 6.9% (measured on a YoY basis) to 3.3 billion euros, resulting in an adjusted basic EPS falling 21% to 30 euro cents. Therefore, Varian’s recurring revenue via a software-based model will be a major driver of top-line growth for Siemens Healthineers in the short-term future.
Varians, as a mature business, requires substantial investment in order to expand operations into different market channels and revenue streams. Being acquired by Siemens Healthineers allows them to enter a league all on their own where they can leverage their new parent company’s resources in a larger operational and sales network to outperform all of its competitors, including Elekta and Accuracy Inc.
Ultimately, this deal sets the way for Siemens Healthineers to become global pioneers in the field of oncology care. The combination of Siemens Healthineers’ detection and diagnostic capabilities with Varian’s radiation therapy proficiencies should prove to be a giant step towards achieving Siemen’s long-term ambitions and goals; something which was in doubt given the decision to float 15% of Siemens’s Healthineers in 2017. However, it is clear to see that the seamless addition of Varian’s radiation therapy hardware to Siemens Healthineers’ already strong modality hardware is going to propel them to an unrivalled position in the field of digital oncology treatment. Once the integration of the 2 firms is complete, the inevitable synergy will allow for everlasting strides to be made in successfully treating cancer and Siemens will hope to be at the forefront of this market. This will largely result from them being able to uniquely offer an ‘end to end’ service where they will cater for patients from the diagnosis stage to treatment completion under one entity.
From a financial standpoint, this deal looks to benefit Siemens greatly in the long run. Reportedly, the Healthineers forecasted cancer incidents to increase by 11 million from 2010 to 2030, so it is no surprise if they reap strong financial rewards from this market. By 2025, synergies of at least €300 million a year are expected from this deal. Siemens are looking to profit significantly from this acquisition as they stand to remain the majority shareholder in Siemens Healthineers. This is despite the fact that their stake in this segment of their business is set to fall from 85% to 72%, largely due to a capital increase used to fund the deal. The Healthineers set themselves a three-phase transformation it wishes to achieve by 2025, and this deal really puts the second phase into perspective. It is clear to see why a 25% premium was paid. By acquiring Varian, Siemens can really begin to establish a strong foothold in the emerging yet exclusive market that Varian operates in; they will own over 50% of the radiation therapy market now. With demand for medical linear particle accelerators increasing over the past few years, this is a great opportunity for Siemen’s to gain control of a market which is likely to continue growing.
Additionally, it would also appear that Varian will be looking to take long term financial reward from the deal. The plateau of their strong initial growth is clear to see, with total Q3 revenues down 16% compared to last year. Though this is largely due to COVID-19, it is inevitable that this acquisition will really help them to grow to the next level and new investment should help improve operations and assist them to continue dominating a sector with excellent gross margins. Alongside Siemens, Varian can really begin to use their cutting-edge technology and multinational customer base to have a substantial effect on oncology treatment.
Overall, the long-term upsides to this deal can be related to Siemens Healthineers intentions to rebuild themselves as a global leading influence in offering oncology treatment of the highest quality, ensuring that it embeds the latest healthcare technological innovations whilst doing so.
Risks and Uncertainties
Risks include the fact that Varian, despite having a bullish rating by investors, might be overvalued with a recent price to earnings ratio of 38, compared to a much lower ratio of 18 for the S&P 500 Health Care Index. This, in addition to the 24% premium that was paid, might indicate that Siemens Healthineers overvalued their target, which could potentially prevent synergies from fully coming to fruition.
Increased levels of risk will be at play due to staggering amounts of uncertainty pertaining to the potential effects of COVID-19 on Varian’s supply chain, workforce, and product demand, as demonstrated by the fact that their revenue has already been negatively affected.
There also exists uncertainty as it relates to the updating of the Affordable Care Act legislation and the net effect on healthcare corporations and providers. Both Siemens and Varians could experience a deep economic hit based on new regulations and excise taxes on mass production and selling of medical equipment.
Current revenue projections for Siemens in fiscal year are set to be flat with no further deterioration of revenue into fiscal year 2021; however, this assessment was given before unprecedented collapses in both EU and US markets due to the effects of COVID-19. Additionally, the timeline in management of the global crisis has greatly expanded.
In light of this deal, the S&P Global Ratings has shifted Siemens AG credit rating from stable to negative. Credit score is predicted to stay low even after the closing of the acquisition. "The planned $16.4 billion acquisition of VMS will lead to a notable increase in adjusted debt, but we expect dynamic deleveraging over the next 24 months”- S&P global rating.