A Sneaky-Smart Med-Tech Buyer Does It Again

Ever since going out on its own, Covidien (NYSE: COV  ) has had a knack for doing deals that left many analysts and investors scratching their heads initially, only to generate better-than-expected revenue and margin synergies from the deals in the years afterward. Coviden is going back to the well again, buying Given Imaging (UNKNOWN: GIVN.DL  ) and further building its efforts in the $3 billion GI market.

The details
Covidien and Given announced an agreement in which Covidien will be acquiring Given for $860 million in cash, or $30 per share in cash. Given is not selling itself cheaply, as Covidien is paying four times 2014 sales and 20 times 2014 EBTIDA for a company that has pretty good gross margins (long in the mid-70%s) but a rather uninspiring history of only single-digit operating margin.

Although Covidien's balance sheet is not exactly flush with cash, this deal will not seriously stress the company's liquidity, nor would it preclude further deals. The accretion is of this deal is likely to be a little complicated with differences in GAAP accounting, cash accretion, and internal returns on capital, but I feel confident in saying that it will take a couple of years for this transaction to make much (if any) positive impact on Covidien's consolidated results.

Building a presence in GI
Given Imaging has been a popular name for some time now whenever the subject of potential M&A targets has come up in the med-tech sector. Unlike many smaller U.S. med-techs, Given has actually been rather successful in Japan and the company has managed to establish 85% global share in the pill/capsule endoscopy market, despite competing with Olympus -- one of the leading names in endoscopy.

With that, it's an interesting buy for Covidien. The company has a modest presence already in endoscopy, trailing Johnson & Johnson (NYSE: JNJ  ) and Olympus, but coming in ahead of Boston Scientific (NYSE: BSX  ) and Stryker (NYSE: SYK  )  -- any one of which could have theoretically been acquirers of Given. More to the point, it strengthens Covidien in the $3 billion/year GI market and should help build on the 2012 acquisition of Barryx, an endoscopic ablation technology company.

Given is looking to extend its addressable market into the colon/colonoscopy space, and I can see why Covidien might feel that this is synergistic with the company's existing minimally invasive endomechanical business. Colorectal surgery is seen as the next (or one of the next) major markets for greater minimally invasive penetration -- only about 20%-30% of colorectal surgeries are done by MIS means (as opposed to around 90% for bariatric and choly), and having a less invasive diagnostic device like Given's PillCam in hand could be an incremental share-driver against J&J and Intuitive Surgical (NASDAQ: ISRG  ) .

Better still, while Johnson & Johnson has endoscopes and colonscopes, they are not going to have the pill approach. I can't see Olympus and Johnson & Johnson tying up, and I don't believe the remaining private players in the pill/capsule space would move the needle on revenue enough to attract their attention.

The bottom line
At worst, Covidien can't do much to improve the hit-or-miss year to year unit growth that Given has experienced and bundling less invasive imaging has little or no halo effect on Covidien's endomechanical and/or energy sales in the GI space. In such a situation, Covidien can at least de-duplicate much of the "G&A" spending and generate a steady stream of unspectacular cash flows. In a best case scenario, though, Covidien leverages Given's pill technology into a more comprehensive imaging solution for the GI market and a driver of minimally invasive tools revenue in a large and under-penetrated space.

All in all, it's a very Covidien-like deal. It seems a little strange until you dig into it, and it's not likely going to be a flashy game-changing deal. What it is though is a somewhat expensive, low-risk deal that could help Covidien unlock a few more lucrative points of market share in a never-ending battle with Johnson & Johnson, Olympus, Stryker, and Intuitive.

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