Shares of Cardinal Health (CAH 81.83) are trading 11% lower in pre-market action following the news that it is going to acquire the Patient Care, Deep Vein Thrombosis, and Nutritional Insufficiency businesses from Medtronic (MDT 80.36) for $6.1 billion in cash. The real hit, though, is in the added announcement that Cardinal Health doesn't expect to meet analysts' average earnings expectation for fiscal 2017 and doesn't expect any non-GAAP EPS growth in fiscal 2018 despite the aforementioned deal being accretive to earnings.
Cardinal Health anticipates the acquisition closing in the first quarter of fiscal 2018. It is understandably excited about the impending acquisition since it is complementary to its medical consumables business. Moreover, the Medtronic businesses generated $2.3 billion in revenue for the 12 months ending October 2016, with more than 70% of total sales in the U.S.
It is Cardinal Health's belief that the acquisition will be accretive to non-GAAP diluted earnings per share from continuing operations by more than $0.21 per share in fiscal 2018, by more than $0.55 per share in fiscal 2019, and increasingly accretive thereafter, with synergies exceeding $150 million annually by the end of fiscal 2020.
That sounds encouraging, yet the post-acquisition benefits have been overshadowed by some otherwise disappointing guidance for Cardinal Health's overall business.
Specifically, Cardinal Health also announced today that it sees fiscal 2017 non-GAAP EPS from continuing operations at the bottom of its previous range of $5.35 to $5.50. Analysts, on average, were expecting fiscal 2017 non-GAAP EPS to be somewhere closer to the midpoint of the guidance range.
The tempered outlook was attributed to expected fourth-quarter results, which are going to be pressured by generic deflation that the company now expects to be low-double digits for the full fiscal year.
Given its fiscal 2017 non-GAAP EPS expectation, Cardinal Health said its preliminary view for fiscal 2018 is for non-GAAP EPS to be flat to down mid-single digits.
The latter is particularly disappointing, because it takes into account the expected accretion from the acquisition mentioned above. In other words, the fiscal 2018 earnings guidance would have been even more negative if the Medtronic business lines were not being acquired.
Cardinal Health simply said that several company-specific discrete items will have a negative impact on EPS of at least $0.50, with approximately half due to an expected high-single digit profit decline for its Pharmaceutical segment versus fiscal 2017, which will stem in part from mid-single digit generic deflation in fiscal 2018.
Fiscal 2019 non-GAAP EPS is expected to grow at least high-single digits versus fiscal 2018. That's a hopeful consideration, yet it has been effectively lost in the more immediate mix of disappointing guidance for fiscal 2017 and fiscal 2018.