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Stretching its wings
June 2012
by Jeffrey Bouley  |  Email the author
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BEDFORD, Mass.—With both companies' boards of directors in unanimous agreement about the transaction, Hologic Inc. and San Diego-based Gen-Probe Inc. announced at the end of April that Hologic will—pending shareholder approval and regulatory clearance—acquire all of the outstanding shares of Gen-Probe for $82.75 per share in cash, or a total enterprise value of approximately $3.7 billion.  
 
The all-cash transaction—which represented a 20-percent premium over Gen-Probe's closing price on April 27—is expected to be funded through available cash and additional financing of term loans and high-yield securities, with expected completion of the deal in the second half of this year. The combined company expects to realize approximately $75 million in cost synergies within three years following the close of the transaction and the parties anticipate strong free cash flows that reportedly will be used primarily to reduce debt. The expectation is to return to pre-transaction leverage levels within three years.  
 
Gen-Probe is "an ideal partner and strategic fit to Hologic's existing diagnostics business" and complements the company's focus on women's health while adding diversification to its product portfolio, according to Rob Cascella, president and CEO of Hologic, who adds, "this transaction combines best-in-class technologies with strong market presence and global distribution to more effectively target the rapidly growing molecular diagnostics market, strengthens Hologic's diagnostics business through the addition of Gen-Probe's broad product portfolio and automation platforms—more specifically, this gives Hologic critical mass in the molecular diagnostics market and makes Hologic the largest diagnostic company focused on women's health—it enables Hologic's direct sales and dealer network internationally to further drive the adoption of Gen-Probe's tests in developed and emerging markets around the world, and it is expected to be 20 cents accretive to Hologic's adjusted earnings per share in the first fiscal year following the close of this transaction and significantly more accretive thereafter."
 
Cascella also expects the combination of the two companies to be accretive to both top- and bottom-line growth rates and notes that bringing Gen-Probe into his company's corporate fold will move Hologic into adjacent diagnostic markets—specifically organ transplant and infectious disease areas—which are new to Hologic and offer promising opportunities.  
 
Hologic is a developer, manufacturer and supplier of diagnostics products, medical imaging systems and surgical products that serve the healthcare needs of women, with core business units focused on breast health, diagnostics, surgical gynecology and skeletal health. The company's portfolio covers mammography and breast biopsy, breast magnetic resonance imaging, radiation treatment for early-stage breast cancer, cervical cancer screening, treatment for menorrhagia and uterine fibroids, osteoporosis assessment, preterm birth risk assessment and more.  
 
For its part, Gen-Probe is a leader in molecular diagnostics products and services, offering such fare as the TIGRIS and PANTHER automation platforms and an extensive menu of sexually transmitted disease tests, including the APTIMA line of chlamydia/gonorrhea, human papillomavirus and trichomonas products.  
 
In addition, Hologic says that Gen-Probe's PROCLEIX line of HIV, hepatitis and West Nile virus blood screening products and strong partnership with Novartis provide an attractive market, "with a global reach and significant growth opportunities for the combined company," which would reach more than 150 countries.  
 
With Hologic's direct sales and marketing structure in Europe, and its investment in China distribution, "the growth trajectory of Gen- Probe's products is significantly enhanced," the companies maintain, noting that, in particular, Hologic has more than 500 employees focused on diagnostics in China.  
 
"This transaction provides compelling cash value for our shareholders and represents an outstanding opportunity for our business," noted Carl Hull, chairman and CEO of Gen-Probe, in the news release about the deal. "Together, Gen-Probe and Hologic will be very well positioned to pursue a complete range of diagnostic opportunities in women's health, with a stronger focus on the dynamic molecular diagnostics market."
 
Investors haven't been nearly as excited about the potential acquisition, however. After hovering around $21 for much of April, share prices for Hologic dropped to around $19 the day the acquisition was announced and then continued to drop, though the price remained fairly stable at around $17 per share for most of the first half of May, when this story went to press.
 
While wary about the acquisition—and also disappointed at the recent decision by Hologic to discontinue its Adiana system—Zacks Investment Research acknowledged the potential value of combining the two companies.
 
"Though the company [Hologic] reported an uninspiring second quarter, the announcement of the Gen-Probe acquisition was significant," Zacks pointed out in an investor note. "If the deal goes through, the combined company will become a prominent player in the HPV business, which has players like QIAGEN. However, an increasing debt burden along with higher interest expense will adversely affect the bottom line … Offering a wide range of products, Hologic has become an industry giant in the field of women 's health products. The proposed acquisition will further strengthen its position in this field. We are also encouraged by [recent] product approvals, which should help the company in recording higher sales going forward. Over the long term, we are neutral on Hologic."  
 
A more jaundiced view came from Tycho Peterson, an analyst with JP Morgan, who wrote in a note to clients the day of the announcement, "Given Hologic's history of value-destructive M&A (e.g., Cytyc, Third Wave Technologies), and that both companies are in the midst of major product launches where street expectations have come up, this deal raises significant questions about the ability of each company to independently accelerate organic growth. "
 
Code: E051202

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