AMSTERDAM Philips (PHG.AS) plans to buy U.S. sleep therapy products maker Respironics Inc RESP.O for $5.1 billion, its largest deal to date in an aggressive expansion in the fast-growing health-care sector.
Philips has been on a shopping spree in recent weeks, agreeing to buy U.S. lighting maker Genlyte Group GLYT.O for $2.7 billion and medical systems and services provider Visicu EICU.O for $430 million.
Together with a 5 billion euro share buyback announced this week, the acquisitions are a leap forward in Philips' efforts to reduce its cash pile and return to a leveraged balance sheet by the end of 2009.
"We have passed the 10 billion euro mark twice -- for closed and announced acquisitions as well as for the total of realized and announced share buybacks," Philips Chief Executive Gerard Kleisterlee told journalists on a conference call.
"In total, we are talking about a reallocation of over 20 billion euros of capital since 2005," he said.
Philips -- the world's biggest lighting maker, a top three hospital equipment maker and Europe's biggest consumer electronics producer -- said it would pay $66 per share for Murrysville, Pennsylvania-based Respironics, a 24 percent premium to its Thursday closing price.
The acquisition will add to earnings from the beginning, Philips said.
The purchase price amounts to about 22.5 times expected 2008 earnings before interest, tax and amortization.
"The multiples are relatively high but in line with the strong growth rate of this company," SNS Securities analyst Victor Bareno said in a note.
The deal could be a signal of more to come in U.S. medical technology sector, according to some industry observers.
"There was a decent amount of M&A in medtech in 2007 until August, when the credit markets collapsed. This deal today says that M&A is still alive and well," said BMO Capital Markets analyst Joanne Wuensch.
The weak dollar is also a contributing factor, she added. "Just as Europeans are out shopping on Fifth Avenue, they're also out shopping for U.S. companies."
Respironics shares were up $12.25 to $65.36 in morning Nasdaq trade. Philips shares fell 2.12 percent to 30.06 euros in Amsterdam.
HOME HEALTH CARE
Respironics is focused on medical equipment used in the home, particularly to diagnose and treat sleep and respiratory disorders such as obstructive sleep apnea. It has recorded a compound annual growth rate of around 19 percent in recent years. Its main rival is ResMed Inc (RMD.N) (RMD.AX), whose shares were up 15 percent in New York.
The head of Philips Healthcare, Steve Rusckowski, said he expects Respironics to continue to show double-digit growth rates, adding that the company's core profit margin of around 15 percent was also expected to improve.
"We are taking a very important step that will establish Philips as a leader in health care beyond the hospital and will create an almost 8 billion euro health-care sector for Philips with global leadership positions in cardiac care, acute care, and now home health care," Kleisterlee said.
The acquisition also makes Philips' U.S. business -- which contributes about 50 percent of its medical revenue -- less sensitive to the market for hospital imaging equipment, such as computed tomography (CT) scanners. That market has been under pressure from a regulatory change.
The U.S. imaging market, which Philips says shrank 12 percent to 15 percent this year and is expected to be flat next year, is the key reason Philips has said its medical division is unlikely to meet its 2007 targets. The division, which competes with GE Healthcare (GE.N) and Siemens Medical Solutions (SIEGn.DE), is key to Philips' strategy of becoming a more predictable, higher-margin company.
Philips has sold its volatile chip business, and analysts say the company could raise 5 billion to 6 billion euros over the next two years by selling other stakes, such as LG Philips LCD (034220.KS) or Taiwanese contract chip maker TSMC (2330.TW). Philips ended the third quarter with 5.2 billion euros in cash.
Two U.S. hedge funds owning 1.6 percent of Philips recently sought discussions with the Amsterdam-based company over its capital structure.
Chief Financial Officer Pierre-Jean Sivignon said the company's recent acquisitions would not push it into debt, it has room for more buys, and it will work on an acquisition pipeline.
The Respironics deal is expected to close in the first quarter of 2008.
(Additional reporting by Debra Sherman in Chicago; Editing by David Cowell and John Wallace)