Cooper Companies seen as next logical contact lens target post AMO/Abbott deal

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As The Cooper Companies (NYSE:COO) continues its strategy of utilizing cash to pay down debt, sources familiar with the company told dealReporter a shortlist of M&A suitors could be eyeing the pure-play contact lens player.

Cooper’s CFO Eugene Midlock declined to comment on whether the company has been approached or has run a process. However, Albert White, VP of investor relations at Cooper, responded that ”a lot of bankers pitch different ideas, different structures and so forth, but we don’t comment on any acquisition information or news.”

A source familiar with the company and a private equity source both agreed that Cooper, the number three company in the contact lens market, has not run an official sale process over the last few years, even though it has repeatedly been flagged as an M&A candidate. Yet, both separately pointed out that buyers could show an appetite to strike a deal. JPMorgan and KeyBank have traditionally worked with Cooper as financial advisors.

In fact, Cooper’s strategy has been compared to that partaken by Advanced Medical Optics (AMO), which was acquired by Abbott Laboratories in January (NYSE:ABT) for USD 1.36bn. It is understood that Advanced Medical Optics was not on the formal ”chopping block,” but bidders knew it was at a price that was available. The deal also signified a foray for Abbott into the ophthalmology space.

This week Abbott Chairman and CEO Miles White said during the company’s Q1 earnings conference call that it is not looking to make any large deals.

White did say that he has a bias towards smaller to mid-size deals that are manageable for the company such as the acquisition of Advanced Medical Optics – now branded Abbott Medical Optics.

Although Midlock questioned selling at the current valuation, an industry banker said Cooper’s stock has run up over the last three months at a time when peers have seen declines in share prices due to the economy. Cooper’s shares closed at USD 27.29 on Friday 17 April, an increase from January’s prices of around USD 19.

The private equity source said given that contact lens and lens care company Bausch & Lomb will not be sold by Warburg Pincus for at least a few years – it is correct to point to Cooper as the next largest potential acquisition in ophthalmology.

Cooper sells healthcare products through its two business units: CooperVision (CVI), which is involved in a broad range of contact lenses, and CooperSurgical (CSI), which focuses on medical devices, diagnostic products, surgical instruments and accessories used primarily by gynecologists and obstetricians.

The source familiar noted that interest for Cooper, with a USD 1.2bn market cap, could eventually come from Abbott, as it could bolt-on Cooper to its Abbott Medical Optics franchise. France-based spectacle lens giant Essilor International (EPA:EI) could be interested in complementing its business with contact lenses, he further said. Still, the source admitted that the list of suitors is not that long.

In addition, the private equity source said logical buyers could be Japanese companies, as the issue of vision correction is more prevalent in Japan than in the US. He said the chances for firms which are trying to move into ophthalmology more aggressively – such as Medtronic (NYSE:MDT), Boston Scientific (NYSE:BSX) or Johnson & Johnson (NYSE:JNJ) – would be limited as they may find Cooper’s platform too mature.

The private equity source rationalized that a Japanese company, such as Olympus Corporation (TYO:7733) or ophthalmic and medical equipment company, Nidek, would be interested in buying Cooper for access to the US markets. But the industry banker commented that Olympus remains overleveraged due to its USD 1.92bn Gyrus acquisition in 2007.

As for Cooper’s products, the private equity source described the contact lens business as ”stale” and not having much in the way of a product pipeline other than slightly better contact lenses. Any firm looking to buy Cooper would also have to consider that CooperVision’s contact lens business makes a bulk of its sales to optometrists, he added. This can be contrasted to such peers as Alcon (NYSE:ACL) or Bausch & Lomb which have ”exciting growth” in the way of their medical surgical side, which sells to medical doctors or ophthalmologists.

Midlock, however, pointed out that the company’s contact lens business is in all key modalities – for example single use, weekly and monthly – in silicon hydrogel and conventional hydrogel materials. In addition, he said, the company has products in all segments including torics (with the recent introduction of Biofinity torics), multifocals, single-use spheres and non single-use spheres. Further, CooperSurgical has 19 core product categories. ”We are well diversified in both of our business segments,” he said.

Tilting in Cooper’s favor is its ”decent” price-to-earnings ratio. Based on an EPS estimate of USD 2.55, Cooper is currently trading at 10.5x on a forward looking basis, similar to JNJ.

As of 31 January, Cooper reported USD 1.8m in cash and cash equivalents and USD 41m in short term debt. USD 532m has been drawn on its USD 650m senior unsecured revolving line of credit due in January 2012.

The company also reported negative free cash flow of USD 9.2m. Midlock added that in Q1 of 2010 the company would consider its first acquisition. ”Right now the message is to put our heads down and execute, deliver free cash flow and use that money to pay down debt,” he said.

Midlock said for the year Cooper is looking at free cash flow of excess of USD 50m and over the next five years in excess of USD 800m.

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