Demant: Implants Divestiture to Cochlear Provisionally Challenged, but We Anticipate It Will Proceed

Narrow-moat Demant DEMANT announced that the U.K. Competition and Markets Authority’s provisional finding (prior to the final report in early June) is that the divestment of Oticon Medical to Cochlear could create a “substantial lessening of competition” in the region. The implants divestiture was expected to close in the second quarter of 2023, but it is now doubtful given the CMA’s preliminary findings. Demant and Cochlear are also awaiting decisions from various other entities regarding the effects on competition and foreign direct investments.

Oticon Medical’s implant market share is in the low single digits globally, far below Cochlear’s around 60%, and Demant does not have a strong implants presence in larger hospitals. MED-EL and Sonova’s Advanced Bionics are more evenly matched, with estimated market shares in the high teens. Due to the breakdown of the major players in the space, we find it unlikely that Demant, Cochlear, and the CMA won’t be able to come to an agreement on how to proceed with the transaction. We still believe the divestiture is likely to occur, but with less certainty following the CMA’s provisional findings.

Management has provided updated guidance that, should the transaction fail to close by the end of fiscal 2023, there will be an estimated negative impact to after-tax profit of DKK 100 million-DKK 200 million from discontinued operations. This is up from the anticipated negative DKK 100 million previously guided if the divestiture closed in the second quarter. This adjustment does not affect our fair value estimate of DKK 240 for Demant.