Intriguing Health-Care Spin-Off on the Horizon

As part of  Cardinal Health's (CAH) plan to spin off its medical products business into a new public entity, Cardinal shareholders will receive 0.5 shares of the new company, called CareFusion, for every share of Cardinal they currently hold. This is a slight change from the original deal, which called for a one-for-one share allotment. Cardinal indicated it reduced the number of shares distributed to better line up CareFusion's market value with the value of its competitors. Cardinal will keep around 20% of the company, and will slowly divest its shares over a five-year period once the spin-off is complete. Here is Morningstar equity analyst Matt Coffina's initial take on CareFusion:

"Health-care conglomerate Cardinal Health is preparing to spin off its medical products businesses, and we are intrigued. The new public company, called CareFusion, will be a leading manufacturer of hospital equipment, including infusion delivery systems (Alaris), medication dispensing cabinets (Pyxis), respiratory therapy products (the Viasys brands), infection-prevention products, and surgical instruments. While some of these products are relatively commodified, the more complicated systems can be differentiated by their technology, and CareFusion appears to enjoy some brand loyalty. One of the main justifications for the spin-off is that it will increase CareFusion's focus and allow it to invest more in research and development. We think CareFusion will benefit from secular growth trends (the aging population in developed countries, the growing percentage of global gross domestic product devoted to health care, and the increasing focus of payors and providers on patient safety and reducing preventable medical errors), and we expect the company to see mid-single-digit organic revenue growth over the long run. Some administrative costs should be scalable, so operating income should grow somewhat faster than this.

"Assuming the spin-off occurs this summer as planned, CareFusion will begin its life as a public company with relatively weak pro-forma results, which is why we think this could be a transaction worthy of investors' attention. Although about 60% of CareFusion's revenue is of a recurring nature (services, disposable supplies), the rest is tied to hospital capital spending, which has been severely impacted by the economic and financial market downturns. In Cardinal's fiscal third quarter (which ended March 31), the segment that will become CareFusion experienced a 6% decline in revenue and a 22% decline in operating income. Reduced hospital capital spending, a shipping hold on Alaris infusion pumps related to a product defect, and foreign exchange headwinds were behind the declines. We do not expect these headwinds to continue indefinitely, and in fact CareFusion may experience unusually strong growth in future quarters as pent-up demand from hospitals hits the market."

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