This morning, Danaher (DHR) announced a cash deal to acquire Pall (PLL) for $127.20 per share for a value of approximately $13.8 billion. This would suggest a valuation of 21x trailing EBITDA based on Pall's consensus estimates. Additionally, Danaher plans to split into two separate entities with most of its life sciences-related businesses part of a company retaining the Danaher name and the other segments part of the other company.
While we believe the deal makes sense for Danaher, we don't think it would make sense at this valuation for Thermo Fisher Scientific (TMO), which is also reportedly interested in the Pall asset.
For one, Danaher has a cash hoard, and its current debt/EBITDA ratio is about 1.0x, which will allow it to raise less debt at a cheaper price (under 2% interest rate). TMO, on the other hand, has a 3.6x debt/EBITDA ratio vs. the company's target of 2.5x-3x. It has also been more aggressive in capital allocation so far this year ($500 million share repurchase, $300 million acquisition of Advanced Scientifics) and not necessarily preserving capital for a larger deal.
Our proprietary accretion analysis does not support a TMO acquisition at the suggested valuation. In fact, the $13.8 billion price tag implies over 1% dilution, even under our most aggressive assumptions. Thermo would first have to lever up to 4.5x pro-forma EBITDA and borrow $8.3 billion at relatively high rates (we assume 3.2%), which would leave about $5.5 billion of equity to raise (or 42 million shares at the current price). We also assume Thermo is able to work its tax rate magic to bring the blended tax rate to the company's current corporate tax rate of 14%-15%. The result of all this work suggests Thermo's pro-forma earnings per share would come in at roughly $8.00/share, $0.10 below current consensus estimates for $8.10/share.
Since Danaher, alternatively, is likely to achieve high- single-digit accretion from the PLL acquisition, we see no reason for Thermo to instigate a bidding war as it is at a severe disadvantage. We believe other, more reasonably valued opportunities, will present themselves in the space and look forward to Thermo paying down some debt in the meantime to build capacity.