By Greg Peel
Remember takeovers? They used to be a dime a dozen back in those long ago crazy, hazy days - before July. But under the new credit regime the words "private" and "equity" only now meet in shady downtown bars, having once been the toast of the town. And the T-word, which effectively added 30% to every stock in the index, driving it to all time highs, is no longer much on the agenda. We're almost back at all time highs again now actually, but ours is not to reason why.
That hasn't stopped Southern Cross Equities from having a realistic look at cochlear implant global market leader Cochlear (COH) and deciding it really should be ripe for the picking. With a gearing ratio of only 44% there's no reason why private equity shouldn't show an interest, notes Southern Cross, but let's be realistic - a takeover bid is more likely to emerge from amongst global trade buyers.
Cochlear is the undisputed market leader in a market that enjoys "phenomenal" growth of 25% per annum. But it is not just pulling in the greatest sales, note analysts Stuart Roberts and David Raddyffe, it is "benefiting more from its own efforts to shape the market with new products, services and outreach initiatives". Hence a prospective buyer would not simply be swallowing the pesky competition, it would be acquiring the whole future of the market.
At first glance, a PE multiple of 30x is a bit of a stretch for a takeover. But the analysts suggest it's not really that hard an ask. They looked at a number of recent medical device deals in the US with a ticket of US$1 billion or more, and found the average multiple was indeed 29. And a multiple of 30 is not that unreasonable for a high growth medical device franchise, even if the credit markets have clipped private equity wings. Cochlear is the leading player in what is effectively a high-growth duopoly, and for that reason alone should command a substantial acquisition premium, say Roberts and Raddyffe.
Cochlear's operating environment going into FY08 remains extremely favourable, the analysts suggest. For starters, government funding thrown at cochlear implants left, right and centre across the globe in FY07. Newfoundland became the second Canadian province to start a program in April, New Zealand bolstered its implant funding in May, Oregon mandated insurance coverage in June and the Indian province of Andhra Pradesh followed suit in July. As number one player, Cochlear derives huge benefits.
The company is also benefiting from an independent study suggesting the sooner a deaf child receives an implant the better, and from its own licensed development of the Mandarin Early Speech Perception tool, which will assist in the obvious growth market of China.
Cochlear has a current market cap of US$3.5 billion. Southern Cross sees Minneapolis-based, US$61 billion Medtronic as the obvious candidate, and there has already been speculation in the past. The fit here is that Medtronic leads the world in cardiovascular implants. The ubiquitous Johnson & Johnson - Dow component with a market cap of US$182 billion- is another who has tried, without success to date, to get into cardio implants, and could see cochlear implants as an additional high-growth opportunity.
Southern Cross also throws into the ring US$21 billion cap Covidien, a surgical devices specialist, and US$6 billion Sonova, the world's second largest supplier of hearing aids behind Germany's engineering giant Siemens.
Cochlear's shares are trading around $76.50 at present. As a result of its M&A musings Southern Cross has lifted its target price from $74 to $87. The FNArena database shows a B/H/S ratio of 4/5/1 with an average target of $69.50. Cochlear has had a pretty spectacular FY06-07, and the major brokers have chased the price up all the way.
