Siemens Healthineers to buy Varian in $16.4bn deal
By: Noah Wehn and Omar Ali
On August 2nd, 2020, Siemens Healthineers announced its intention to buy Varian Medical Systems in a deal that values the software developer and producer of devices for cancer care treatments at $16.4bn. As a consequence of the deal, Siemens Healthineers will become a major player in the rapidly growing field of oncology and will be able to provide a holistic portfolio for cancer care by combining their hardware and software offerings.
Company Details: Siemens Healthineers
Headquarters: Erlangen, Germany
CEO: Bernd Montag
Number of employees: 54,100
LTM Revenue: $14.69bn
LTM EBITDA: $3.0bn
LTM EV/Revenue: 2.72x
LTM EV/EBITDA: 13.55x
Company Details: Varian
Headquarters: Palo Alto, California
CEO: Dow R. Wilson
Number of employees: 10,062
LTM Revenue: $3.2bn
LTM EBITDA: $580.5m
LTM EV/Revenue: 4.86x
LTM EV/EBITDA: 27.03x
The blockbuster acquisition of Varian by Siemen Healthineers has created an unrivalled global healthcare leader with the strongest foothold in the oncology sector vertical and marks Healthineers first major growth move since it was spun off and floated by Siemens in 2018. The combined entity will be able to provide a portfolio of end-to-end oncology solutions to address the entire continuum of cancer care, which is increasingly pivotal in a market where health providers are progressively attempting to reduce the complexity of their supply chains.
Siemens Healthineers has agreed to purchase the entirety of the shares in Varian for $177.50 each in an all-cash deal, representing a 24% premium to Varian’s closing price prior to the announcement. The deal has been approved by Varian’s shareholders and in February 2021 gained approval from regulators clearing the final hurdle in the deal going through. Management are expecting the deal to be accretive to Siemens Healthineers' adjusted basic earnings per share within 12 months. Conglomerate Siemens, the majority stakeholder in Healthineers, is providing a bridging loan of $17.9 billion to Healthineers of which Healthineers will seek to replace 50% through a rights issue later this year.
Siemens Healthineers defend the premium by emphasising the inevitable long-term rise in the incidence of cancer worldwide from 14 million cases in 2010 to a forecasted 25 million in 2030 with approximately 50% of all cancer patients requiring some form of radiotherapy as part of their treatment. In monetary terms, this means a $20 billion addressable market size that is forecasted to grow at an annual rate of between 6% and 10%. Combined with the expectant synergies of around €300m a year which are expected to be reaped by fiscal year 2025, management are confident in the deal and describe Varian as an “icon in our industry”.
Both Varian and Siemens Healthineers complement each other’s existing operations with a collective suite of diagnostic tools, imaging, radiotherapy and AI capabilities allowing them to lead at the forefront of innovation in oncology through digital transformation, more efficient diagnosis, increased treatment quality and access, and personalized precision cancer care whilst simultaneously improving outcomes for millions of patients worldwide.
The acquisition of Varian is an essential step in Siemens Healthineers’ move towards growth as it seeks to offset the slowing down of demand for its advanced imaging modality business, which includes products such as CT and MRI scanners that are part of a more competitive and mature market segment. Acquiring Varian adds another mature product to its hardware portfolio as well as a fast-growing software business with the exclusive benefit of Varian possessing over 50% of the radiation therapy market, with its only main competition coming from market peers Elekta and Accuray Inc.
Moving forward, Healthineers must realise Varian has reached an inflexion point where progressing to the next level of growth will require substantial investment in operations and greater access to established distribution channels in order to maximise Varian’s potential. Although Varian’s revenue growth has been stagnant in the last five years, the gross margin remains strong for this sector. Healthineers must ensure it leverages its far larger operational and sales network and apply it to Varian’s product segments.
Risks and uncertainties
S&P Global Ratings revised Siemens AG’s outlook from stable to negative based on the limited headroom left under the company’s previous rating due to the partial financing of the acquisition of Varian by Healthineers, one of its subsidiaries. This will lead to a steep increase in adjusted debt but S&P expects that the dynamic will be altered through aggressive deleveraging over the next 24 months in order to decrease the debt burden.
While antitrust regulators have given the green light for the deal to go ahead, only the future will tell whether the 24% takeover premium was reasonable or if Siemens Healthineers overvalued their target. Some issues could arise in regards to the post-merger integration as Varian has a long history in the USA and Healthineers in Europe. This might make it more difficult to transfer the business model and gain access to each other's customers alongside the challenge of fusing two different corporate cultures. Moreover, it can be questioned to what degree Siemens will be able to utilise the projected synergies given that Varian will stay an independent brand and whether a holistic product can be created.