We all knew that Johnson & Johnson (NYSE: JNJ) wanted to do a deal, but I'm not sure we realized it wanted to do a deal this badly.
Today, J&J announced that it has reached an agreement with Pfizer (NYSE: PFE) to acquire the latter's consumer health-care business for $16.6 billion in cash. Most analysts were expecting a price tag of around $14 billion for this collection of well-known brands including Listerine, Sudafed, and Rolaids, and it seems that J&J beat out would-be suitors such as GlaxoSmithKline (NYSE: GSK) and Reckitt Benckiser.
What's the bottom line? Every deal has two parts -- the asset(s) acquired and the price paid. In this deal, I love the first part, but I'm not nearly so thrilled about the second.
Pfizer's consumer health business is an excellent collection of brands and will only get better when over-the-counter Zyrtec, a popular allergy drug, is added to the mix. And people tend to underestimate this sector -- it produces rich cash flows and isn't nearly as sensitive to issues like FDA approval, reimbursement, and patent expiration. After all, a branded pharmaceutical is worth almost nothing to its creator after patent expiry, but Listerine has been around for nearly 100 years. What's more, there should be long-term global growth potential from these brands.
On the other hand, the price tag is reason for pause. Whether you look at price-to-sales, EV-to-EBITDA, or other valuation metrics, Johnson & Johnson is paying a lot of money for this asset. Along those lines, it won't even be accretive to earnings until 2009 -- and not until 2010 on a GAAP basis. J&J would argue, though, that this is a different and superior collection of assets than those of prior deals and that it can do more with this business than past acquirers could with their transactions.
I'll be honest -- this wasn't the deal I expected. When J&J walked away from the $25 billion deal to Guidant (letting Boston Scientific (NYSE: BSX) take it), I assumed it would be looking to bolster its device and/or drug businesses. Even if you want to agree with J&J management's statements that the drug business is underestimated, I'm not sure how much top-line punch this deal will give the company.
Then again, management did mention that doing this deal doesn't preclude it from doing another deal in a different segment of the business, like drugs or devices. And it's tough for me to complain too much about buying into cash-rich brands that can be leveraged from Walgreen (NYSE: WAG) to Wal-Mart (NYSE: WMT). I'm sure the stock will sell off today, and I'd still like to see a deal in the device sector, but this doesn't shake my faith in J&J as a good long-term holding.
For more Foolish thoughts on the health-care sector:
Johnson & Johnson, GlaxoSmithKline, and Merck are
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Pfizer and Wal-Mart are
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Fool contributor Stephen Simpson owns shares of J&J but has no financial interest in any stocks mentioned (that means he's neither long nor short the shares). The Motley Fool has a disclosure policy.
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