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Baxter/Hillrom: healthcare acquirer pays steeply for blanket solution

Baxter Bioscience updates

Baxter is a US healthcare company in need of a pick me up. Its two biggest units — renal care and drug-delivery systems — accounted for more than half of the company’s $11.7bn sales last year. Unfortunately, dialysis machines and intravenous drip bags are low-margin businesses generating little growth.

That explains why Baxter wants to make a pricey bet by swooping on Hillrom. It is buying the Chicago-based maker of hospital beds and patient monitoring devices for $12.4bn, including debt.

Baxter needs new ideas. But a multibillion dollar acquisition in a totally new area will not offer any panacea.

The sweetened offer of $156 a share represents a 26 per cent premium to Hillrom’s closing price on July 27, when news of the approach was first reported. The deal implies an enterprise value to ebitda multiple of 19 times for Hillrom, well above Baxter’s 14 times. 

But Hillrom — despite its specialisation in futuristic smart beds that can detect patient conditions — hardly offers fast growth. Revenue actually contracted 1 per cent to $2.9bn in its last financial year. The year before that, its sales rose just 2.1 per cent. Baxter has not done much better. Revenue in two of its three biggest units actually fell last year.

There is an argument the pair will be stronger together. Patients want to receive more care at home. At the same time, hospitals and other care providers are investing in technology to monitor their patients remotely. Baxter and Hillrom could become a one-stop shop for this shift by selling beds and monitoring equipment as a package.

That could lure in additional business and lift profit margins, especially if more buyers adopt Hillrom’s connected medical equipment. But expect pushback from governments and insurers: both want to contain costs for healthcare-related products and services.

Baxter forecasts $250m of cost savings after 2024, worth $2bn taxed and capitalised. That just about covers the premium. Baxter needs to hit its targets or it will simply have got bigger for the sake of it.

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