(XRAY) DENTSPLY Grabs Astra Tech for $1.8 Billion

In a bid to bolster its foothold in the global dental market, leading dental products maker DENTSPLY International (XRAY) has agreed to buy Astra Tech, the dental implant division of multinational drug major AstraZeneca PLC (AZN), for $1.8 billion in cash.

The Anglo-Swiss pharmaceutical giant is selling the dental unit to renew focus on its core prescription drug business. Other financial terms of the deal were not disclosed by the entities.

The transaction, which is subject to antitrust clearance, is expected to complete by end-2011. Morgan Stanley (MS) is acting as financial advisor to DENTSPLY on the deal. DENTSPLY plans to finance the acquisition with cash, commercial paper and long-term debt. The company had cash and cash equivalents of roughly $575.3 million in first-quarter fiscal 2011.

Compelling Prospect

Sweden-based Astra Tech, with annual sales of $535 million, is a leading provider of dental implants and consumable medical devices in the urology and surgery markets.  The entity offers a comprehensive suite of dental implants and abutments through its Astra Tech Dental unit.

Astra Tech’s Atlantis business is a leader in the fast-growing customized dental abutment segment. Moreover, its Astra Tech Healthcare division is a leading provider of hydrophilic intermittent catheters with LoFric being a leading brand in Europe.

The deal, if eventually consummated, will unite two of the fastest growing dental implant businesses, creating the third-largest player in this market. Besides reinforcing its leadership in the global dental market and broadening its product range, the acquisition will unlock opportunities for DENTSPLY to tap new markets, such as surgical and urological consumable medical devices, for growth. The European hydrophilic intermittent catheter market represents an exciting fresh growth opportunity for the company.

Financial Impact

DENTSPLY, which registered sales of roughly $2.2 billion in 2010, expects the acquisition to increase its revenues by 25% and to be accretive to its adjusted earnings by 12-17 cents a share in the first year following the deal closure.

Moreover, in the third year, the acquisition is forecast to add 30-40 cents to earnings and will also provide opportunities for sales and operational synergies. Further, the strong cash flows of the integrated entity will provide financial flexibility.

Neutral on DENTSPLY

DENTSPLY should benefit from the gradual recovery in the global dental market. Not being a life-sustaining product, the dental market was badly affected by the economic downturn that resulted in patients deferring their adoption. The company remains optimistic that the positive internal growth, achieved in the last two quarters, to continue through 2011.

DENTSPLY is poised to grow its share in the dental implant market, driven by a strong product base and significant investment on product/technology innovation and sales/marketing infrastructure.

The company’s diverse product range, significant international presence, new product introductions and acquisition initiatives are expected to boost operating metrics over the forthcoming quarters. However, its domestic operations still remain challenged due to a slow economic recovery and competitive pressure.

We also note the unfavorable impact of the supply chain disruption due to the earthquake and Tsunami in Japan on the company’s bottom line. Although DENTSPLY has taken proper actions to address the supply outage, the company expects such disruption to dilute its fiscal 2011 earnings, as reflected in its revised guidance, issued in April.

Currently, we have a Neutral rating on DENTSPLY.  The stock currently retains a Zacks #4 Rank, which translates into a short-term “Sell” recommendation.

ASTRAZENECA PLC (AZN): Free Stock Analysis Report

MORGAN STANLEY (MS): Free Stock Analysis Report

DENTSPLY INTL (XRAY): Free Stock Analysis Report

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