St. Jude Grabs AGA for $1.3B - Analyst Blog

In a bid to boost its cardiovascular business, medical devices major St. Jude Medical (STJ) has struck a definitive agreement to acquire Plymouth, Minnesota-based heart devices maker AGA Medical Holdings (AGAM) for $1.3 billion. The transaction has been cleared by the Boards of both companies. 

Shares of AGA Medical, which went public in October 2009, jumped $5.98 (or 40.6%) to $20.69 in pre-market trading on October 18 while St. Jude's shares rose 16 cents (0.4%) to $40.06.

The Deal

Under the deal terms, shareholders of AGA Medical will receive $20.80 (in the form of cash and/or stock) for each share they hold. This represents a roughly 41% premium over AGA Medical's closing price of $14.71 on October 15.

The consideration will be evenly split between cash and St. Jude common stock. AGA Medical shareholders will be given an option to choose between shares and cash. The deal value ($1.3 billion) includes the assumption of $225 million of AGA Medical debt.  

St.Jude intends to use its available cash to finance the cash portion of the purchase consideration. Moreover, the company will repurchase up to $600 million of its shares to offset the shares to be issued as part of the deal.

The acquisition, which is subject to customary closing conditions and regulatory approvals, is expected to close by end-2010. On successful consummation of the transaction, AGA Medical will be integrated into St. Jude's cardiovascular division.

BofA Merrill Lynch, a unit of Bank of America (BAC), and law firm Gibson, Dunn & Crutcher are acting as advisors to St. Jude on the deal. AGA Medical's biggest shareholders including the private equity firm Welsh Carson Anderson & Stowe (a 44% stake holder) and the company's co-founder Franck Gougeon (holding 19%) have agreed to the merger.

A Lucrative Prospect

AGA Medical specializes in devices for treating structural heart defects and vascular abnormalities with minimally invasive transcatheter treatments with revenues of $199 million in 2009. Many of the company's products are used to treat heart defects in children. Its coveted AMPLATZER occlusion (closure) devices are currently sold in 112 countries.

AGA Medical has a robust pipeline with a number of products currently under clinical trials. Should they be successful, St. Jude can look forward to blockbuster opportunities. The company is currently conducting four clinical trials to seek new geographic approvals and expand the label and market potential of its occlusion devices.

Three of these trials are evaluating the potential of these devices in treating stroke and migraine caused by a type of heart defect called patent foramen ovale (PFO). Another trial is in progress to evaluate the potential of a left atrial appendage (LAA) occlusion device in reducing the risk of stroke in atrial fibrillation patients.

A Clear Leader in the Making

AGA Medical has the leading share of the market for structural heart defect occluders. The acquisition of the entity will make St. Jude the sole medical devices company in the structural heart market with devices in all major categories (including PFO and LAA). The integration of the complementary product lines will make the combined entity a leading player in this market.

An Opportunity to Diversify

St. Jude contends with pricing pressure and heightened competition in mature pacemaker and ICD markets. The company, like its peers Medtronic (MDT) and Boston Scientific (BSX), is exploring new avenues of growth by targeting smaller companies with promising growth prospects.

In September 2010, St. Jude inked an agreement to invest $60 million in privately-held cardiac devices maker CardioMEMS, for a 19% stake. The deal represents a significant opportunity for St. Jude to boost its technologies focused on improving heart failure management.

The AGA Medical deal provides the company with the opportunity to expand into fast-growing new therapy areas beyond its legacy ICD and pacemaker markets. The acquisition is expected to considerably strengthen St. Jude's atrial fibrillation and cardiovascular franchises. The LAA closure device, in particular, is expected to usher in fresh growth opportunities across these businesses.

Financial Impact

AGA Medical has historically grown at a healthy pace with revenues increasing at a compound annual rate of 19% over the last five years. St. Jude expects the acquisition to help its sales grow in the low double-digit rate in 2011. Moreover, the deal is expected to be accretive to earnings (on a GAAP basis) starting 2011.

St. Jude expects to incur a non-recurring acquisition-related charge in fourth-quarter 2010. The company will provide more update on the deal in its third-quarter earnings call scheduled on October 20.

Neutral on St. Jude

We remain intrigued by St. Jude's ability to deliver consistent revenue and earnings growth. The company is poised to savor incremental opportunities in the CRM segment (especially in ICDs) on the back of strong product momentum. Other positive factors are represented by solid fundamentals, healthy growth trajectory, strong product mix and improved operating leverage.

However, the company is challenged by competition-driven pricing pressure and the heightened competition in the pacemaker market. Moreover, we are cautious about the dilutive impact of acquisitions and any unfavorable currency exchange fluctuations on the bottom line. This is reflected in our long-term Neutral recommendation for the stock, which is supported by a short-term Zacks #3 Rank (Hold).

 
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