Deutsche Bank Has Mixed View of Hypothetical Abbott Labs (ABT) & St. Jude Medical (STJ) Deal

Deutsche Bank analyst Kristen Stewart said she was "somewhat mixed" on a potential Abbott Labs (NYSE: ABT) and St. Jude Medical (NYSE: STJ) deal. Earlier rumors from the Financial Times said Abbott was preparing a $25 billion offer for St. Jude, but the speculation was later denied by Abbott in a statement to Bloomberg. Stewart questioned if buying St. Jude would be the most efficient use of capital.

"We believe that with the addition of STJ, ABT's Medical Device division and more specifically its vascular franchise, would be significantly improved. The industry has also consolidated around ABT and STJ. The two have had a GPO partnership contract for years but as one company, the opportunities for contracting would be greater. There would be the opportunity to leverage transcatheter valves and heart failure. Perhaps the improvement of Medical Devices could also set up for an eventual spin-off situation farther down the road to potentially further enhance shareholder value," said Stewart.

"At $25 billion, this would value STJ at approximately $90 per share, or approximately 21x our 2016 EPS estimate. While there would be sales and cost synergies with the vascular franchises, we believe this would be full value also considering ABT would also be taking on STJ's existing debt and future debt from the pending (and pricey in our view) acquisition of Thoratec (NASDAQ: THOR) which has its own set of benefits and risks. We downgraded STJ shares on July 23 based on our view that the Thoratec acquisition, while it expands the portfolio does not seem to provide a significant amount of accretion or growth acceleration, future competitive concerns around STJ's CRM business, and the valuation at the time seemed more fair," continued the analyst.

Stewart added, "For us, the better vantage point is not in the context of Medical Devices but ABT overall and whether buying STJ is the most efficient use of capital for ABT as a diversified company. That is, are there greater opportunities across the other business units and across other geographies, especially considering the considerable amount of cash that is trapped outside the US; albeit interest rates are low and ABT does have balance sheet capacity. It was our belief that Abbott would ideally look to use its monetization of the MYL investment more OUS. We believe ABT's management team will be prudent in its capital redeployment decisions."

For an analyst ratings summary and ratings history on Abbott Labs click here. For more ratings news on Abbott Labs click here.

Shares of Abbott Labs closed at $43.98 yesterday.

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