ii view: Smiths detects higher sale price for medical business

Squeezing out more value for shareholders yet leaving a highly diverse business. We assess prospects. 

Sale of medical business

ii round-up:

Diversified engineer Smiths Group (LSE:SMIN) today announced a higher priced deal under which it plans to sell its medical device making business.

It now plans to sell its maker of respiratory devices and catheters to US-based business ICU Medical for $2.7 billion plus an additional $100 million which is dependent on the future share price performance of the enlarged ICU Medical business. 

In early August, Smiths had announced plans to sell the business to TA Associates for $2.3 billion plus a contingent future share price performance of $200 million. 

Smiths Group shares rose by more than 2% in UK trading, bringing their gain since pandemic induced market lows back in March 2020 to around 65%. Shares for fellow engineers Melrose (LSE:MRO) and Johnson Matthey (LSE:JMAT) are up by 92% and 56% respectively. 

Smith’s supplies niche products to industries including oil and gas, mining, airport operators and construction and domestic appliance markets.

The sale of its medical business is being made in order to both simplify and leave Smiths Group focused on growth in its core industrial technology arenas. 

Smiths expects to receive initial net cash proceeds on completion of the ICU transaction of $1.85 billion (equivalent to £1.34 billion). About $50 million more than under the TA deal. It will also receive 2.5 million new ICU Medical shares, worth $0.5 billion at ICU Medical's closing share price on 7 September, equivalent to approximately 10% of the enlarged ICU Medical share capital. 

Approximately 55% or around £737 million of the initial net cash proceeds will be returned to shareholders via a share buyback.  The balance will both strengthen its balance sheet and support investment opportunity. 

ii view:

Working on a common operating model, its businesses all share the characteristics of being well-positioned in growing markets, technology-led, asset-light and with a high proportion of aftermarket revenues. During its last financial year to end of July 2020, the medical business generated sales of £918 million from a total of £3.47 billion. The John Crane business generates its biggest slug of sales at just over one third of the overall total. Of which just over half comes from energy, including both oil and gas and renewables. Geographically, the USA is its biggest market at just over 40% of sales.

For investors, exposure to virus hit sectors such as energy and aerospace have created headwinds and, with under 5% of sales generated in the UK, foreign exchange movements can also impact. But its diversity of product, region and underlying customer sector offer attraction. A higher price achieved for the medical business also suggests management is working hard for its shareholders, while a forecast dividend yield of around 2.7% is not derisory in an ultra-low interest rate environment. In all, Smiths remains a well-managed business for the long term.

Positives: 

• A diversity of business type, underlying customer and geographical location
• High proportion of aftermarket revenue

Negatives:

• Customers include Covid hit aerospace and energy sectors                       
• Exposure to unpredictable foreign exchange movements

The average rating of stock market analysts:

Buy