Update: CFX

So CFX is buying DJO Global for $3.15B. At prevailing prices of $25/share, the market cap of CFX is $3.1B.

This acquisition is a merger of equals.

CFX put out an investor presentation outlining their thinking and vision. Part of the investment thesis in CFX is good operation and capital allocation.

There are things to like and dislike about this merger. On the plus side, there is improved diversification, superior margins, higher growth, and less cyclicality. On the negative side, there is integration risk elevated by the level of leverage.

The company has outlined a path to deleveraging, including disposing off its A&GH unit.

Before the merger, CFX was expected to earn $2.20 – $2.30/share this year. At at 15-18x multiple (good management in a cyclical, low margin business), it was probably worth $33-40/share. Given the 123M shares out, this would imply a value of $4.15-4.95B.

CFX is paying 12x EBITDA for DJO Global (adj EBITDA = $269M). Its peers in the Health Care Equipment & Services sector trade for mid to high teen multiples. So the price CFX paid doesn’t seem crazy, especially given the $800M in NOLs that they inherit.

The TTM FCF (EBITDA) for the combined entity is $650M ($767M). At the current share price of $25, the market is valuing CFX’s FCF at a 9.5x multiple [9.5 * $650M – $3.15B)/123M ~ $25].

If CFX can sell A&GH at a decent price, they can delever and improve overall margin. Then the 10%+ FCF implied in the current price appears attractive.

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