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Coronavirus Tester Gets $10 Billion of Good News

Coronavirus Tester Gets $10 Billion of Good News

(Bloomberg Opinion) -- For a company that develops coronavirus tests, it can’t be much of a surprise that somebody wants to buy the entire business.  European diagnostics group Qiagen NV on Tuesday accepted a 9 billion-euro ($10 billion) takeover offer from a larger U.S. peer, Thermo Fisher Scientific Inc. The timing makes sense for both sides, but the seller looks to be on the better side of the deal.

Qiagen extracts DNA and proteins from biological samples and makes them ready for analysis. The coronavirus, and bid speculation, has made it a favored stock lately. Last year was different. The shares plunged after an October profit warning and news that the chief executive officer was stepping down. An initial approach from Thermo Fisher sent them higher in November, but those talks failed and the stock crashed just before the end of the year.

Now the pair have agreed an all-cash deal at 39 euros a share. Given the recent market turmoil, benchmarking that price is tricky. The 23% premium to Monday’s close rises to a more reasonable and fair 32% when compared to the price before the first set of talks last year. It starts to look expensive if you consider that the offer is 70% above Qiagen’s recent low. But the price is similar to where the Qiagen shares were trading after last year’s talks emerged — it’s clearly in the ballpark of what investors were seeking.

Qiagen brings growth. Revenue is forecast to increase at an average annual rate of 6% over the next four years. What’s more, Thermo Fisher has identified cost savings and revenue synergies worth $200 million after the deal closes, implying total acquired operating profit would be worth about $780 million based on 2023 forecasts.

In absolute terms, however, Thermo is paying up for this boost. Adjust for tax and the stream of profits from Qiagen still represents only a 5% return on the full $11.5 billion acquisition cost (which includes assumed net debt). With Qiagen’s cost of capital estimated at 7%, Thermo Fisher needs to achieve something better. Capitalized at $122 billion, it may be able afford to pay such a full price for a deal this size. Even so, it has its work cut out to generate good returns.

Thermo Fisher could well accelerate Qiagen’s business much faster than its initial projections suggest. Even leaving aside the increased demand for diagnostic testing kits as a result of the coronavirus this year, the pairing offers the usual benefits of health-care mergers: eliminating duplicate research and development and using each other’s distribution networks.

Qiagen has got a buyer on the hook after a difficult period with no permanent CEO and lingering investor doubts over its strategy. The deal shows that even with that backdrop, bargains in health-care M&A are hard to find.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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