Up 8%: Does Cooper Companies Inc's Buyout Make Sense?

Cooper's deal for Sauflon isn't cheap, but adds valuable products and potential growth leverage

Jul 1, 2014 at 4:13PM

Eye care specialist Cooper Companies (NYSE:COO) is getting into the med-tech merger game and not just as a "me too" player. The company's acquisition of Sauflon Pharmaceuticals carries a steep price at nearly six times forward revenue, but the company is filling out its silicone hydrogel product line and advancing its position in this market by years. Although I continue to believe that Cooper would be well-served to either grow its ob/gyn and fertility businesses or divest them, it's hard to argue with a company generating double-digit growth and double-digit returns on capital.

The deal
Cooper announced after the close on Monday that it had reached an agreement to acquire Sauflon Pharmaceuticals, a British soft contact lens manufacturer. Sauflon is a small player on the overall global stage, with less than 2% contact lens market share, but the company has a particularly strong position in silicon hydrogel (or SiH) lenses, with a full line of SiH dailies including spheres, torics, and multifocals.

Cooper is paying a steep price for Sauflon – paying 5.7x the forecast $210 million in revenue for Sauflon for the year ending October 31, 2014. This is not an unreasonable premium for growth med-tech, as deals can routinely go off at 6x to 8x revenue, and Sauflon is looking for 22% yoy growth for fiscal 2014.

Cooper will largely fund the transaction with debt, and its current $1 billion credit facility carries a rate of LIBOR plus 0-75bps. Management will likely look to transfer some of this to term debt, but overall interest costs will be quite low. Management's comments don't suggest that cost synergy efforts are an immediate priority, but I would expect opportunities to trim duplicate back-office expenses as well perhaps as some overlapping manufacturing, marketing, and R&D costs.

What Cooper gets from this
In buying Sauflon, Cooper is giving its SiH business a real shot in the arm. Cooper has a history of doing well in complex areas like torics and multifocals, but the company was slow to get on board with SiH and has been playing catch up in this premium category (which can carry premiums of 20% or more).

Sauflon's Clariti line of daily SiH lenses is expected to grow 43% to $85 million this fiscal year, and the combination will push Cooper into the number two slot in Europe's soft contact lens market with about 30% share (behind Novartis's Alcon at 35% and ahead of Johnson & Johnson at 26% and Valeant's Bausch & Lomb at 8%). Globally Cooper will still be number three with about 20% share, behind Johnson & Johnson's 43% share, Novartis/Alcon's 24% share, and Valeant/B&L's 9%.

Importantly, Sauflon gives Cooper a full line of SiH dailies, including spheres, torics, and multifocals. On its own, it was going to take Cooper a few years to get there and while the Clariti line got FDA approval in 2013, the company has only launched on a limited basis in the U.S. Sauflon's Clariti line does not mean that Cooper is abandoning its MyDay line; Cooper will go forward with Clariti as the mass-market line and MyDay as a premium product.

SiH lenses still look like a growth opportunity. Leaving aside the revenue benefit from a more complete product line, Cooper is also looking at a U.S. market where SiH penetration it about half that of Europe or Japan. It may be hasty to assume that the U.S. market will quickly move to parity, the incremental growth potential is still meaningful for Cooper.

The bottom line
I continue to believe that there are opportunities for Cooper to grow its ob/gyn and fertility businesses; this segment saw 9% revenue growth in the fiscal second quarter with high teens growth in fertility, and I believe the company still lacks optimal scale for this market. Be that as it may, I have no major quibbles with the Sauflon deal as it quickly fills gaps in Cooper's product portfolio and augments the fastest-growing part of the vision care business (SiH sales were up 20% in the second quarter for Cooper).

Cooper doesn't leap out as a cheap stock, but I do not believe the shares are expensive. If Sauflon can help facilitate the company's progress toward 9% annual revenue growth and free cash flow margins in the low to mid 20%'s, the shares are still undervalued.

Leaked: An even better growth opportunity, for those who move quickly enough
The best investors consistently reap gigantic profits by recognizing true potential earlier and more accurately than anyone else. Let me cut right to the chase. There is a product in development that will revolutionize not how we treat a common chronic illness, but potentially the entire health industry. Analysts are already licking their chops at the sales potential. In order to outsmart Wall Street and realize multi-bagger returns you will need The Motley Fool’s new free report on the dream-team responsible for this game-changing blockbuster. CLICK HERE NOW.

Stephen D. Simpson, CFA has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson and Valeant Pharmaceuticals. The Motley Fool owns shares of Johnson & Johnson and Valeant Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers