Alere (ALR - Free Report) , a medical products company focused on integrating rapid diagnostics with health management, disclosed that it plans to offer $450 million of senior notes due 2018, subject to market and other conditions.
In a bid to finance the outstanding $250 million aggregate principal amount of 7.875% senior notes due 2016 and redeem outstanding revolving borrowings amounting to $97.5 million, Alere plans to issue notes through a private placement. The amount left will be utilized for working capital and general corporate purposes. This implies that debt refinancing is not the only intention of Alere and it wants to ensure sufficient liquidity through this offering.
According to Alere, the rest of the amount will be used to finance potential buyouts, share repurchases and capital expenditures. The company can also make post-closing payments or earn-out payments for acquisitions completed earlier.
As far as earn-out payments are concerned, Alere has a long way to go before the company pays off its contingent considered obligations. For 2012, Alere’s maximum earn-out payment with respect to the Amedica takeover is $6.9 million and for the Diagnostik acquisition is $1.8 million. The maximum earn-out payment for the eScreen acquisition is $70 million through 2014 and for the MedApps takeover is $22 million through January 2015.
The DiagnosisOne takeover requires Alere to make earn-out payments of $33 million. However, we note that these earn-out payments depend on the company’s ability to meet certain financial targets.
Alere still has a number of outstanding debts including senior subordinated debts due in 2016 and 2018. The company exited third quarter 2012 with a long-term debt of approximately $3.6 billion.
Exiting the third quarter, Alere had a debt-to-capital ratio of 61.34% compared with peers’ mean of 30.88%. The company’s debt-to-equity ratio of 217.91% towers over the peer mean of 44.67%. These financial ratios reflect Alere’s high dependence on debt financing. Moreover, a higher interest expense associated with higher outstanding debt might drag the company’s bottom line.
We currently have a long-term ‘Neutral’ recommendation on Alere which carries a short-term Zacks #3 Rank (Hold rating). Our cautious outlook on the stock is supported by the tough competitive landscape which the company faces with Becton, Dickinson and Company (BDX - Free Report) .