The Incredible Shrinking GE Turns Biopharma Into Danaher Cash

On the day it finalizes its spinoff of GE Transportation and merges it with Wabtec(WAB), GE(GE) announces an even larger divestiture, selling off its Biopharma unit to Danaher(DHR) for $21 billion in cash. Danaher will also take on $400 million in pension liabilities. GE CEO Larry Culp, former CEO of Danaher has taken another major step in shrinking and stabilizing GE with this deal.  While not a spinoff, this deal leaves behind a GE Healthcare with $17 billion in annual revenue which may not fit well with GE’s power and other large business segments, and another GE spinoff remains a possibility. Investors cheered the deal, with GE stock up over 17% in premarket trading this morning to nearly $12 per share, its highest level since last October.

Danaher itself is no stranger to these pages. In 2016, it completed a spinoff of Fortive(FTV). Currently, it is on track to spin off its Dental business in the second half of this year, which is also when the deal to buy GE Biopharma is set to close. The Biopharma business had about $3 billion in revenue in 2018 and “is a leading provider of instruments, consumables and software that support the research, discovery, process development and manufacturing workflows of biopharmaceutical drugs. The business comprises process chromatography hardware and consumables, cell culture media, single use technologies, development instrumentation and consumables, and service.”

Danaher’s own announcement of the deal notes that due to tax benefits, the effective price is $20 billion and that this represents a multiple of 17 times expected 2019 EBITDA for the business. Danaher will operate the acquires business as a standalone unit in its existing Life Sciences unit, which has about $6.5 billion in annual revenue. The company plans to raise $3 billion in an equity offering and will use the proceeds as well as cash on hand and additional debt to pay for the purchase. The company may also receive some cash from the upcoming Dental spinoff.

Danaher projects that the transaction will reduce GAAP earnings, but increase non-GAAP earnings in 2019.

Danaher estimates the acquisition will reduce GAAP diluted net earnings per share by approximately $1.15 to $1.20 but will be accretive to non-GAAP, adjusted diluted net earnings per share by approximately $0.45 to $0.50 in the first full year post acquisition. The non-GAAP, adjusted diluted net earnings per share amounts exclude anticipated non-cash amortization, purchase accounting charges and transaction expenses attributable to the acquisition, as well as stand-up costs related to carving out the business. The dilution impact from the anticipated equity financing for the transaction is included in both of these GAAP and non-GAAP diluted earnings per share figures.

This deal, combined with the Dental spinoff, represents a major transformation for Danaher, just as it is an important step in GE’s ongoing transformation. Danaher has been one of the best performing stocks in the history of the stock market. GE has, well, not been, as of late. We believe that both will emerge as stronger companies as a result of this deal.

Disclosure: The author holds shares in GE