We all knew that Johnson & Johnson
Today, J&J announced that it has reached an agreement with Pfizer
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
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
For more Foolish thoughts on the health-care sector:
Pfizer and Wal-Mart are Motley Fool Inside Value selections.