GE recently announced that a part of its ongoing restructuring effort it will spin-off its GE Healthcare division.
GE will spin off 80% of the company to shareholders and then “monetize”, sell, their remaining 20% stake.
The announcement peaked out interests because, one, we like investing in spin-offs because above average returns can be achieved by investing in spin-offs.
and two, GE Healthcare will pay a dividend after the spin-off.
Then using comparable multiples we want to come up with an estimate of fair value for GE Healthcare before it is spun off.
GE Healthcare’s Dividend
Management said that GE Healthcare will pay a dividend in line with its competitors.
GE healthcare’s biggest competitors and yields are:
GE Healthcare’s two biggest competitors are Siemens and Koninklijke Phillips. But these two companies are large conglomerates. The lower yielding pure-play medical and life science companies are better dividend yield benchmarks for GE Healthcare.
Our guess is GE healthcare will pay a dividend close to a 1% dividend yield when it starts trading. We’ll know more as the spin-off deadline gets closer and GE releases more info about the spin-off.
Leading Medical Imaging & Diagnostic
GE Healthcare is one of the leading medical imaging and patient monitoring companies. Medical imaging includes Xrays, MRIs, CT Scans, Mammography, and computed tomography. Patient monitoring includes Electrocardiograms, infant incubators, ultrasound, anesthesia management, and respirators.
Ge Healthcare has about 21.4% of the medical imaging and patient monitoring market. Siemens has 25.8% and Philips has 18.8%.
Ge Healthcare is a leading company in life sciences. It provides the tools to help drug discovery, genetic sequencing, genetic research, and genetic therapy. Life sciences also include protein research and contract manufacturing.
Switching Costs
Hospitals often are referred to as a GE hospital or a Siemens hospital. Meaning the hospital is dominated by either GE or Siemens machines and software.
It helps GE and the hospital to negotiate on the procurement of a wide range of equipment. GE can deploy a smaller sales force to sell its entire catalog of products and hospitals can get better “bulk” pricing. It also reduces the hospitals’ search costs. Instead of reviewing every single manufacturer and supplier for a given product the hospital can find most of what they need with one provider.
GE Healthcare’s imaging machines also come with their own suite of software. The embedded software creates a data trap and a learning curve trap locking in hospitals.
The data trap usually applies to an ecosystem like Apple. You’ve purchased music, movies, apps, and other software that only works within the Apple ecosystem. To leave the ecosystem is to lose everything and start over. We consider GE Healthcare’s imaging software as “Data Trap Lite”. The hospital still owns all the data and they are free to transfer their data to any new system but the transfer process is time consuming, costly, and there is a risk the data doesn’t transfer in full.
The learning curve trap is when the hospital switches to a new software system the hospital has to retrain everybody body that uses it. This requires a lot of time and effort to get everyone proficient with the new software and systems. This can become costly if the transition leads to increased misdiagnoses and malpractice suits.
To avoid all these potential issues, the hospital will stay with its current systems and software as long as everything is functioning appropriately.
Valuation
Ge healthcare’s spin-off announcement did not have much detail in it. We know that GE Healthcare did $4,254 billion in EBITDA in 2017. GE will also transfer $18 billion in debt and pension liabilities to GE Healthcare.
Using comparable EV/EBITDA multiples and GE’s shares outstanding we can estimate a per share value of GE Healthcare.
This gives us an Enterprise Value range of:
Less debt and pension liabilities.
Divided by GE’s total shares outstanding gives us a per share value range of.
We’ll ignore the high value and use the low and mean values as an estimate for GE Healthcare’s value per share. We tend to favor the low estimate to account for any valuation errors made on our part.
As more details come out we’ll update our estimate of fair value.
