Abbott Laboratories Agrees To Acquire Alere At Lower Price

Finally the much contentious merger of Abbott Laboratories (NYSE:ABT) with Alere is nearing its close. As expected, the financial terms of the deal have been amended.

Amended Terms

Per the amended terms of the agreement, Abbott has agreed to pay $51 per common share to acquire Alere, a reduction from earlier deal of $56 per common share in cash upon the completion of the transaction. This results in a new expected equity value of approximately $5.3 billion, reduced from the originally expected equity value of approximately $5.8 billion.

The transaction, which was inked on 1 Feb 2016, is now expected to close by the end of the third quarter of 2017, subject to the approval of Alere shareholders and the satisfaction of customary closing conditions, including applicable regulatory approvals. Notably, the company also extended the last date of receiving necessary regulatory approvals from Apr 30, 2017 to Sep 30, 2017.

Also, both the companies, which were engaged in legal battles with each other on issues regarding the pending merger, agreed to dismiss their respective lawsuits.

The Legal Battle

Notably, the legal battle came into spotlight last August when for Alere filed a complaint against Abbott Labs in the Delaware Chancery Court. It wanted to force Abbott Labs to take all the necessary actions to obtain anti-trust approvals and fulfill its obligations under the terms of the merger agreement.

Alere’s accusation was based on Abbott Labs’ reluctance to complete the deal. In fact, Abbott Labs even requested to call it off in Apr 2016.

Abbott’s version was that, it had serious concerns regarding the accuracy of various representations, warranties and covenants made by Alere in their merger agreement. It also agreed to pay the legal costs in the range of $30–$50 million in respect to Alere’s transaction expenses, which was rejected by the latter.

Against Alere’s lawsuit, in December, Abbott filed a lawsuit to terminate its $5.8 billion purchase of the former quoting a substantial loss in the value of Alere’s stock since they struck the deal.

With the legal actions finally dropped now, according to a Bloomberge article, “The renegotiated price was better than many on Wall Street expected.”

Share Price Performance

In this regard we note that, Abbott’s shares underperformed the Zacks classified Large Cap Pharmaceuticals industry over the past month on litigation qualms with Alere. The stock lost 5.14% during this period compared with 1.65% loss of the broader industry. The resolution of the matter is likely to boost the company’s stock price in the future.

Our Take

Earlier, Abbott Labs said that it expects its total diagnostics sales to exceed $7 billion post the closure of the transaction. The company will also become a lead player in the $5.5 billion point-of-care diagnostic segment.

We are upbeat about the fact that Alere integration will enable Abbott Labs to gain access to new channels and geographies. Although Alere generated more than half of its total sales of $2.5 billion from the U.S. alone, the company has a growing presence in key international markets, which should further strengthen Abbott Labs’ business in these territories. It will also add Alere's complementary portfolio of diagnostic products, which comprises tests for infections such as HIV, tuberculosis, malaria and dengue.

Zacks Rank & Key Picks

Abbott Labs currently carries a Zacks Rank #4 (Sell). Better-ranked stocks in the broader Medical space include Inogen, Inc. (NASDAQ:INGN) , Orasure Technologies, Inc. (NASDAQ:OSUR) and Hill-Rom Holdings, Inc. (NYSE:HRC) . While Inogen sports a Zacks Rank #1 (Strong Buy), Orasure and Hill-Rom carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Inogen gained 62.2% in the last one year compared with the S&P 500’s gain of 15.1%. The company reported a stellar four-quarter positive average earnings surprise of over 49.08%.

Orasure surged 73.9% in the last one year compared with the S&P 500’s gain. Its four-quarter average earnings surprise was a positive 123.5%.

Hill-Rom gained over 33.9% in the past one year, better than the S&P 500 mark. It posted a trailing four-quarter positive average earnings surprise of 12.03%.

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