Waters Stock Is Falling on Deal to Combine With Becton Dickinson Unit

Waters is merging with a division of Becton Dickinson that makes tools like this one for analyzing cells. (Courtesy Waters Corporation)

Shares of the life science tools maker Waters were falling sharply early Monday, after the company announced a deal to combine with a division of Becton Dickinson, another life sciences giant.

Becton Dickinson’s Biosciences & Diagnostic Solutions division, which sells lab equipment and tools used in diagnostic testing, will combine with Waters, which specializes in other sorts of lab tools, in a complex transaction the companies said was valued at $17.5 billion.

Under the terms of the deal, Waters will take on $4 billion in debt, and issue 39.2% of its shares to Becton Dickinson shareholders. Becton Dickinson shareholders will receive a $4 billion cash distribution as part of the deal.

The new company will keep the name Waters, and will be led by Waters’ current CEO, Udit Batra. Executives from both companies will fill out the leadership team.

The combination will turn Waters into a significantly larger player in the life sciences tools sector, which could help over the long run as it seeks to compete with major players like Thermo Fisher Scientific. In the near term, though, the deal creates new complexities for Waters, and dilutes current shareholders.

Waters shares were down 9.6% Monday, after falling more than 12% in the premarket hours. Becton Dickinson shares were down 0.5%.

The selloff, while surprisingly steep, makes sense: Current Waters shareholders are being diluted, and any major reorganization brings new risks.

Over the longer term, though, analysts said that the added scale of the combined entity could be a major advantage. “Longer term, we like the merits of the deal, creating real scale, which has proven effective in the space, while also beefing up the [total addressable market] and keeping an attractive margin profile,” Jefferies analyst Tycho Peterson wrote early Monday.

One other data point in favor of the deal is Batra’s track record. In 2016, when Batra was CEO of the company then known as Merck Millipore, he closed a $17 billion deal to acquire the chemical company Sigma-Aldrich, the largest deal in the company’s history.

Waters shares had been up 16.5% over the past 12 months, and analysts had predicted steady 10% to 11% earnings-per-share growth through 2028, according to FactSet.

The deal will be structured as a Reverse Morris Trust transaction, a type of tax-advantaged combination through which a Waters subsidiary will merge with a Becton Dickinson spinoff to create a combined entity.

The companies said that the new combined company will have $6.5 billion in revenue in 2025, and an estimated $9 billion in revenue in 2030. The companies expect $1.3 billion in adjusted growth in earnings before interest, taxes, depreciation, and amortization (Ebitda) over the next five years.

“This combination positions us to deliver exceptional long-term benefits for customers and shareholders by uniting Waters’ leadership downstream, in downstream analytical workflows, with BD’s strength in cellular analysis and diagnostics,” Batra said on a Monday morning investor call.

Batra also said that 70% of the combined revenue of the companies were annually recurring, which offers stability.

Analysts on Monday attributed the selloff to a range of worries: Dilution for current shareholders, and new complexities complicating the company’s growth story.

“Investors not loving the move for WAT given fairly modest revenue accretion over the first few years as a combined Company,” Mizuho healthcare equity strategist Jared Holz wrote early Monday in a note to investors.

Write to Josh Nathan-Kazis at josh.nathan-kazis@barrons.com