Last Friday, 77% of Alere Inc. (ALR, Financial)'s shareholders approved a merger with Abbott Laboratories (NYSE:ABT).
"The overwhelming support we received from our shareholders today is recognition of the significant value that the combination of Alere and Abbott unlocks for our global customers, employees and shareholders," said Namal Nawana, president and CEO of Alere
If the corporate transaction materializes, Alere will become a subsidiary of Abbott Labs and its shareholders should receive $56 per common share in cash. The two companies already reached an agreement on Jan. 30, but uncertainty about its closing arose “when Alere delayed filing its 10-K report with U.S. securities regulators.” according to Genomeweb.
Alere Inc. is a provider of health information through its segments of professional, consumer and corporate diagnostic tests.
The company has a market capitalization of $3.99 billion with approximately 86.74 million shares outstanding. On Oct. 21, Alere Inc. (NYSE:ALR) closed at $45.01, up 91 cents (2.06%), and the stock gained 15.14% year to date.
Alere is not a dividend issuer: The company never paid dividend to its shareholders because it preferred to retain earnings instead of paying them to support its growth strategy. The amount of a substantial indebtedness and the merger agreement with Abbott that was reached on Jan. 30, 2016, have impeded the company to distribute part of its earnings to its shareholders in the form of cash dividend.
The total long-term debt amounted to $2.9 billion as of second quarter 2016. Cash and short term investments amounted to $506.24 million for a total net debt of $2.47 billion.
The substantial amount of indebtedness, excluding the current portion of long-term debt of $ 47.10 million, is composed by:
- $1.5 billion under Alere's secured credit facility with various final maturity dates occurring in 2020 and 2022.
- $1.3 billion under Alere's senior notes characterized by the following interest rates and maturities:
- 7.25% senior notes with maturity in 2018.
- 6.5% senior subordinated notes with maturity in 2020.
- 6.375% senior subordinated notes with maturity in 2023.
When compared with the ability of Alere to generate cash flow from operations, the huge amount of debt characterized by a not very comfortable repayment schedule could raise financial problems for the company to find the cash to repay the debt as scheduled, the interest and expenses. Long-term debt to equity (MRQ) is 145.83 versus an industry average of 43.37.
Therefore, Alere does not have enough financial elasticity to distribute part of the cash that generates to its shareholders and could not guarantee it will start its payment in the future.
Furthermore, if this merger with Abbott becomes a reality, Alere, operating as a, Abbott subsidiary, can better pursue its target to make it possible for reliable and rapid diagnostic tests to reach more people around the globe, even those who live in the most remote locations of the planet, likely at lower costs, enhancing the profitability of the business.
Disclosure: I have no positions in any stock mentioned in this article.
