Takeover of a Growing Medical Products Supplier

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St. Louis-based dental equipment and moldings maker Young Innovations (NASDAQ: YDNT) is slated to be acquired by Chicago-based buyout firm Linden Capital Partners. The deal will involve a cash-for-stock exchange of $39.50 per share for all outstanding Young shares. The deal values the company at about $314 million.

What’s in it for Young Shareholders?

The terms of the deal are relatively straightforward. All Young shareholders of record on the stock's to-be-determined final day of trading will receive this cash payment for their shares. Relative to the company's November 28, 2012 pre-announcement closing price of $34.93, the $39.50 buyout price represents a premium of 13.1 percent. However, the company's stock has been on a tear recently due to a series of better-than-expected earnings reports. Relative to its year-ago closing price of $29.62, the current offer provides long-term shareholders with a return of more than 33 percent on their investments.

The Businesses Involved

Young Innovations produces and markets a wide range of dental products, including inserts, supplements and edible pastes and gels. Although its main customers are professional dental clinics, it also markets certain products to retailers in the Americas, Europe and Japan. Young Innovations is also responsible for producing industrial-strength disinfectants and sterilizers as well as heavy-duty dental-office equipment like diagnostic X-ray machines and chemical kits. It offers most of these expensive devices and systems for lease and contracts the provision of financing for such transactions to third-party lenders. It has about 375 full-time employees and earned more than $10 million in profit on about $106 million in adjusted revenues during the 2011 fiscal year.

 Young competes with large multinational corporations like Danaher (NYSE: DHR) and GE (NYSE: GE) in the medical supplies space.  Young's profit of $10 million is nothing compared to the $2.2 billion made by Danaher and $14 billion made by GE.  Both Danaher and GE could have takeover Young along with its brands with the massive stockpiles of cash they have.  GE and Danaher have several X-ray products that they manufacture and distribute that compete directly with Young’s products.  The biggest advantage Young has over the massive competitors is its ability to specialize products to smaller markets and innovate quickly.

Linden Capital is a private leveraged-buyout firm that focuses primarily on acquisitions in the healthcare, biotechnology and life sciences industries. Much of its portfolio is comprised of relatively small companies that engage in biotechnology research. Some of its other assets design and market specific products like specialized diagnostic equipment and surgical inserts. Although the size of the Young acquisition is not particularly noteworthy, Linden rarely invests in companies with such diversified product lines.

However, Linden's acquisition of Young Innovations makes sense in light of its other dental holdings. For instance, the company currently owns a large Florida-based network of retail dental outlets known as Gentle Dental. It appears likely that the company will attempt to increase the value of both properties by providing the soon-to-be-subsumed Young asset with a built-in customer base of over 20 dental clinics. 

Linden may well choose to create synergies between Young and other future retail acquisitions. Alternatively, it may choose to merge the dental-equipment maker's operations with those of other wholly-owned medical-equipment makers like CorPak and HyCor to form a larger entity. This new property might then be spun off in a fresh IPO or sold at a premium to a publicly-traded medical firm.

Future for the Companies

The finalization of the deal between Young Innovations and Linden Capital could be delayed by a pending lawsuit filed on behalf of a class of Young shareholders. The suit alleges that Young's board of directors abdicated its fiduciary responsibility to the company's shareholders by failing to shop around for competing bids. Unlike many similar suits, this legal action may have merit given that Young shares approached the $40 mark just two trading days prior to the formalization and announcement of the buyout. The company's shares traded above $40 per share on a consistent basis during October of 2012.

Further, Young's earnings have demonstrated unmistakable upward momentum over the past two years. Since the end of the recession, 75 percent of its reports have trumped analysts' expectations. Even if the lawsuit does not scuttle the deal, the threat of legal action could force Young's board of directors to delay the current January 12, 2013 deadline for the filing of competing bids. A potential bidding war could push any potential offer price for the company above $42 and significantly increase the deal's theoretical returns.

It is important to note that Young did issue a worse-than-expected quarterly report several weeks prior to the announcement of the buyout offer. Linden Capital may have seized upon this sign of weakness to offer a favorable deal that momentarily appeared more likely to be accepted. In light of this situation, the company's shareholders may have limited recourse. If no action is taken to delay the competing-bids deadline, the proposed buyout appears likely to close by the end of the first quarter of 2013.


mthiessen has no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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