This Healthcare Unit Is Attracting Attention From Big-Name Bidders
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The recent announcement that beleaguered electronics manufacturer Panasonic (NASDAQOTH: PCRFY) would solicit bids for its non-core healthcare business has cheered investors and spurred renewed interest in the company's stock. Although a final timeline for the division's sale has not yet been established, it was recently announced that the preliminary round of bidding had closed. Panasonic is expected to conduct a follow-up bidding round next month.
Although interest in the division has not been overwhelming, it is clear that Panasonic will not find it difficult to offload the asset. The company has received interest from rival electronics manufacturer Toshiba (NASDAQOTH: TOSBF) and publicly traded private equity giant Kohlberg Kravis Roberts (NYSE: KKR). In addition, a number of privately held capital management firms like Bain Capital and TPG Capital Management have expressed interest in submitting bids as well. Since this deal could produce significant synergies for the division's eventual buyer and provide Panasonic with a much-needed cash infusion, the next few months promise to be very interesting for the company's investors.
Comparing the public players: Panasonic, Toshiba, and KKR
Kadoma, Japan-based Panasonic and Tokyo-based Toshiba operate in a number of overlapping sectors of the electronics and computing industries. Although it remains a powerful television and recording-equipment manufacturer, Panasonic has struggled to transition into the realm of cloud-based computing technology and next-generation connectivity equipment. Toshiba has navigated this transition fairly well, but it continues to suffer from poor pricing power and quality-control issues. Obviously, KKR has little in common with either company. Nevertheless, a quick financial comparison between the three firms is warranted.
With market cap figures of $19 billion and $21 billion, respectively, Panasonic and Toshiba are similar in size. Although KKR's market capitalization of about $5.3 billion makes it considerably smaller, it is important to remember that KKR produces far more revenue per employee. Earnings-wise, Panasonic is clearly suffering more than Toshiba or KKR. Its 2012 loss of $9.6 billion on revenue of $92.8 billion produced a profit margin of minus 10.3%. In comparison, Toshiba eked out a profit of $985 million on about $75 billion in total revenue. KKR's $564 million profit on $8.8 billion in revenue gave it a profit margin of nearly 6.5%.
Panasonic's cash flow has the potential to make up for its horrendous earnings figures. With an operating cash flow of $4.3 billion, and $6.3 million already in the bank, its long-term debt load of $14.5 billion looks manageable. On the other hand, Toshiba's $1.7 billion cash flow figure looks shaky next to its $2.7 billion cash hoard and $21 billion debt load. KKR's $7.4 billion cash flow dwarfs its $1.7 billion debt burden.
How the deal might happen
According to initial reports, the sale of Panasonic's healthcare division could fetch as much as $1 billion in hard cash. This would be a welcome infusion of liquidity after the company's crushing 2012 loss. Although the healthcare unit is profitable by a decent margin, it represents a fairly small piece of Panasonic's overall revenue stream.
As such, the company believes that it will enjoy better long-run health without this non-core business in its portfolio. However, it is unclear whether Panasonic will sell the entire unit in one offering or offload its individual components to interested bidders. It is likely that more information will emerge before the official round of bidding in July.
Potential synergies for bidders
Out of all of the potential bidders, Toshiba has the most to gain from a potential buyout of Panasonic's healthcare division. The company manages a small medical imaging division and makes a number of other products that can be put to use in the medical field. As such, it could well parlay this acquisition into a major pickup for its burgeoning healthcare division.
Of course, several of the buyout-specialist firms that have expressed interest in bidding are also significant players in the healthcare space. If one of these companies can combine Panasonic's assets with their in-house medical operations, it could derive tremendous financial and operational benefit.
Long-term benefits for Panasonic and others
Panasonic has publicly announced its intention to generate more than 200 billion yen in sustainable cash flow over the medium term. Although the sale of this division cannot help the company achieve this goal in one fell swoop, it will certainly create cost savings that provide Panasonic with more leeway to turn around its struggling electronics business.
With the company in the early stages of a major restructuring plan, offloading the peripheral healthcare business is likely to be a key first step in Panasonic's inevitable "right-sizing." It should be noted that the firm is also mulling the sale of its separate logistics business.
How to play it?
This deal offers a range of potential benefits for Panasonic as well as the healthcare division's eventual buyer. Since the likely buyer will probably maintain a significant portfolio of healthcare-related assets, the sale is likely to create synergies that could prove profitable for rank-and-file investors. For Panasonic, the deal is likely to spur the turnaround of its flailing core businesses. Unlike many asset sales, this situation could provide attractive opportunities for long investors on both sides of the deal. Traders and long-term investors would do well to take note.
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