Varian On Track To Spin Off Varex In January, Receive $200 Million Dividend

Varian Medical Systems (VAR) is currently in the process of spinning off its imaging component business, Varex Imaging. As part of the transaction, Varex will now send Varian a $200m parting ‘gift‘ (or dividend) to be funded by new borrowings. According to Varian’s CEO Dow Wilson, ‘the Imaging Components business has gained momentum since last May when we announced the planned separation and we now believe that Varex can support this modest change in its planned capital structure.’ It’s always good to hear positive news on the business front prior to a split and it will be worth checking the updated Form 10 to see the updated figures and expected impact on the spinco. For its part, Varian plans on using the funds for share repurchases and paying down debt.

Many are positive on Varian and Fortune recently included the company as a Top 3 Healthcare pick regardless of what happens to Obamacare:

…The Affordable Care Act allowed an estimated 20 million newly covered patients to visit hospitals; without them, many hospital beds may now go empty more often, says Mary Pierson, who comanages $4.9 billion in mid-cap assets for Fairpointe Capital. But the selloff also hit companies that sell equipment to hospitals, unfairly punishing companies such as Varian Medical Systems, which has an attractive estimated P/E of 18 for fiscal 2017. A maker of advanced radiotherapy devices for cancer treatment, Varian gets more than 50% of its revenues—and much of its growth—outside the U.S., where it would be “unaffected by changes to Obamacare,” Pierson notes.

A bit odd that there was no mention of the impending spinoff, but the overseas revenue ‘story’ works for both segments. According to the Form 10, Varex generated over 60% of its sales overseas in 2015, but the company actually notes that may be a negative due to the strengthening USD. Increased sales overseas weakens its overall margins. Given that Varian generates over 50% of its revenues overseas and Varex’s relatively small size, the parent company will still have a significant overseas revenue base. Varian listed global growth as a goal for the standalone company, but it’s unclear what the growth rate differential is between overseas and domestic business. Either way, taking a hit on 50% of your business is rarely good for performance…but I guess it beats getting dinged on it all.

The other item of note in the press release was that the spinoff timing has slipped from the end of 2016 to the end of January 2017. There was no reason offered for the delay, but perhaps it took a bit longer than expected to finalize the capital structure after the improved performance. The delay is only a month so it’s not a big deal, but the situation is certainly worth monitoring, especially if the timing gets pushed back again.

Disclosure: Author holds no position in any stock mentioned.