Tony Freeman’s latest column for MPO Magazine: J&J-Jabil Deal Truly Is Transformative for the Medtech Supply Chain On Aug. 2, 2018 Johnson & Johnson announced a reorganization of its Medical Devices division. Many medtech supply chain company managers spend time, effort, and worry to obtain their next big customer. Increasingly, their competition for these opportunities are global contract manufacturers whose roots are in the electronics industry. Johnson & Johnson’s Medical Device unit signaled an epic shift toward these multi-billion dollar international suppliers in transferring a large percentage of its manufacturing capability to Jabil Inc. last summer. The Jabil transaction is often unremarked by longtime medical device specialists, yet it should draw focus as the economics point to shifts in the profit margins of the medtech industry. Additionally, there is the possibility that these manufacturing behemoths will, over time, shift the procurement for device components from traditional North American and European suppliers to Asian firms where global contract manufacturers have the local infrastructure to ensure both low prices and good quality. Read full article here.
Deal Analysis
On April 6, 2018 NN, Inc. (NASDAQ:NNBR) announced that it would acquire Paragon Medical for $375 million cash. Indiana-based Paragon, a major orthopedic contract manufacturer, had 2017 revenues of $141 million and EBITDA of $24 million. The offer values Paragon at 15.6 times EBITDA on a nominal basis. NN stated that the multiple is best viewed as 9.3X because of significant Year 1 cost synergies including $7.8 million in Day 1 synergies. Details of the synergies were not presented. NN has been an active acquirer of medical device supply chain companies. In 2015 NN bought Precision Engineered Products (PEP), a diversified manufacturer notable for its medical focus. In 2017 NN acquired DRT Medical, an orthopedic machiner. It also acquired Bridgemedica, a device design company, in February 2018. While the Paragon deal multiple may appear high, there is a strategic rationale for NN’s actions. NN’s historic portfolio of industrial businesses have tended to be slower growth and lower potential profitability than medical suppliers. Last summer NN sold its precision bearing company for $375 million, cash still on the books as of year-end 2017. While NN may have paid a premium for Paragon, the move fits with their strategy of swapping businesses with a limited future for medical contractors. In that strategy NN joins Danaher, Teleflex, TE Connectivity, and ITW as American manufacturers changing direction and using significant resources to do so. For detailed information on the transaction please view NN’s presentation: http://phx.corporate-ir.net/phoenix.zhtml?c=110673&p=irol-Agreement Please contact Tony Freeman at tfreeman@asfreeman.com or (917) 868-0772 with comments and questions.
Executive Summary In a laudable strategic and tactical move Airbus acquired majority ownership of Bombardier’s Series C line in a no cash deal. Additionally, Airbus management astutely recognized that Bombardier’s problems could be recast as advantages with their international footprint and supply chain. The Deal On October 16, 2017 Airbus announced it would acquire 50.1% of the equity of the Canadian consortium which owns Bombardier’s C Series airliner. Prior to the deal Bombardier’s market value was $2 billion. Airbus is putting up no cash for its shares and it announced it would move a significant portion of the plane’s final assembly to its plant in Alabama. Analysis The deal is a brilliant gamble by Airbus and a desperate attempt to survive by Bombardier. The C Series regional jet, lauded technologically by aircraft designers, has suffered from poor sales and a near empty order book. One cause has been Bombardier’s chief competitor for the lucrative US regional jet market. Boeing, manufacturer of the market adjacent 737, has been hammering Bombardier in US courts to pay a 300% tariff on Series C aircraft sold in this country. Few airlines wish to commit to a fleet with an unknown price tag so they have stayed away from the modern composite wing Series C, financially crippling Bombardier. Boeing found a possibly unwanted ally in President Donald Trump. The President recently stressed to Canada’s Prime Minister Trudeau that the President strongly supported Boeing’s claim regarding the sale of the “foreign” aircraft (more on this later). Trudeau responded by freezing the purchase of 18 Boeing Super Hornet fighters for the Canadian Air Force valued at $5.2 billion. In August Bombardier leadership looked for a white knight to keep the C Series alive. Airbus offered a no cash deal and ended up with its first regional jet,…
Executive Summary United Technology Corporation’s (UTC) offer for Rockwell Collins reflects UTC’s history of using merger and acquisition for strategic re-positioning. While expensive, a successful transaction should place UTC in an enviable market position among aerospace suppliers. The Deal On September 4th, 2017 United Technologies Corporation (UTC), one of the world’s largest precision manufacturers, announced it would buy Rockwell Collins for $30 billion in cash, stock, and assumed debt. Some criticized the deal as too expensive and brought on by the threat of activist investors pressuring UTC management for better performance. A longer term look shows the Rockwell Collins deal is the latest action in a disciplined M&A strategy that should continue to refresh UTC’s prospects for decades to come. Precision manufacturers of all sizes can learn from UTC on how to effectively sell and buy businesses with an eye to long-term performance. For some time UTC has faced complaints from shareholders for underperforming other industrial firms. There is some truth to the complaint: Source: ChartIQ. Since 2011, UTC shares lagged the broad market. Why? Lack of growth. The company, net of discontinued operations, grew revenues at a gentle 2.4% per year. Profitability similarly lagged, primarily due to the decline in US military spending. Three separate deals reflect UTC’s attempts to expand in the more desirable commercial aerospace markets. Goodrich In 2011 UTC acquired Goodrich for $18 billion. Out of the tire business for years, Goodrich’s $8 billion in annual sales come from landing systems, one of nine core technologies found in most aircraft. At the time of the deal, Wall Street pilloried UTC management for paying too much. Hindsight shows that, though expensive, Goodrich (now part of UTC Aerospace Systems) is a highly profitable contributor to UTC. So, a step in the right direction. Sikorsky Sale In 2015 UTC…