(Story updated at 11:35 a.m. ET)
Hill-Rom, a Chicago-based medical equipment manufacturer, has announced it will acquire Welch Allyn, a Skaneateles Falls, N.Y.-based manufacturer of diagnostic and patient-monitoring equipment.
The $2.05 billion deal is expected to diversify publicly owned Hill-Rom's portfolio, expand its international footprint and allow the capital equipment supplier to gain more revenue outside of the capital spending cycle. Welch Allyn, a family-owned company, has a leading presence in physicians' offices, an area that will be important for Hill-Rom as more care shifts to outpatient settings.
The deal, which brings Hill-Rom into the diagnostic equipment industry, is expected to close before Sept. 30. Hill-Rom CEO John Greisch will serve as president and CEO of the combined company and certain members of Welch Allyn's senior management will join the new, combined company.
The combined company, which will preserve the Welch Allyn name, is expected to be worth about $2.6 billion in revenue and be over 10% accretive to Hill-Rom's fiscal 2016 adjusted earnings per share, and meaningfully higher thereafter, officials said. The company reaffirmed its guidance for the third quarter and fiscal 2015, expecting revenue growth of 13% to 15% in the quarter and 10% to 11% for the year.
Hill-Rom stock opened Wednesday at roughly $55.09 a share following the news, up $2.71, or 5%, from the closing price on Tuesday.
Much of Hill-Rom's revenue is tied to hospitals' long-term capital-spending cycle for products such as beds, patient-handling equipment, furniture and stretchers. The life cycle for Welch Allyn's products—such as thermometers, blood pressure cuffs and other point-of-care diagnostic equipment—is much shorter and is therefore expected to provide the combined company with a more steady revenue stream.
Welch Allyn will make up about 26% of the company's pro forma revenue, which, combined with Hill-Rom's existing surgical equipment and rental revenue streams, should provide the company with a more steady cash flow, Greisch said during a conference call. Acute-care capital equipment will still account for 31% of the combined company's revenue.
“I think giving us a more diverse value-oriented product portfolio to bring to our customers is one of the more compelling benefits from a financial perspective, giving us a more stable revenue stream and steady cash flow stream,” Greisch said.
The new company will have a more complete portfolio of clinical workflow products, adding patient monitoring and sensing equipment to Hill-Rom's nurse call and patient communication offerings. This is one of the more strategic propositions in the deal for Hill-Rom's customers, Greisch said in an interview, and Hill-Rom hopes to further its connectivity efforts by feeding all of these products into electronic medical records or directly to nurses to make them more efficient.
This is "the opportunity to take two of the most well-known brand names in healthcare broadly and put the two together to make one of the most premier healthcare companies based on improving patient care and improving wellness outcomes,” Greisch said.
The move also allows Hill-Rom to move into ambulatory care, where it previously had no offerings. Acute care still makes up about two-thirds of Welch Allyn's business, but its strong reputation in physician offices puts Hill-Rom in a strategic position for the future.
“They obviously know that space well, while today we don't,” Greisch said. “Given the strength of their product portfolio and the value of their brand in that space, I think it gives Hill-Rom another customer channel and another customer platform to look for additional growth opportunities going forward while leveraging the power of both brands.”
Hill-Rom isn't the first company to see the value in the physician's office. Last year, medical supply distributor Henry Schein Inc. agreed to acquire Cardinal Health's $300 million physician office-focused business, an area in which Schein excels, while Cardinal tends to handle more large-volume distribution for hospitals. The partnership has performed well for Schein and should be good for Cardinal as well, as Schein agreed to purchase Cardinal Health brand products and use the company as a primary source for supplies.
Geographically, Welch Allyn has a presence in Hill-Rom's strongholds of France and Germany, as well as the U.K., but otherwise has limited international infrastructure, Greisch said. Hill-Rom believes it can accelerate international growth for Welch Allyn's products; the combined company is expected to earn about 63% of its revenue from North America, 21% from Europe and 16% from emerging markets and other regions.
Annual cost synergies of at least $40 million are expected to come from the deal by fiscal 2018, with additional revenue synergy opportunities, Hill-Rom executives said. The company is expected to have roughly $110 million to $120 million in full-year ongoing capital expenditures.
The combined company will be based in Chicago with a major presence in Welch Allyn's current hometown of Skaneateles Falls, N.Y.