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Is Thermo s $834M Kendro Acquisition Headed for a Showdown With the SEC?

Thermo Electron’s acquisition of Kendro Laboratory Products is raising red flags around the chances for success in the regulatory-approval process for the deal.

Waltham, Mass.-based Thermo Electron last week announced the signing of an agreement to purchase the Kendro Laboratory Products division of Australia-based SPX for $833.5 million in cash.

The 1,600-employee Kendro unit, which is headquartered in Asheville, NC, manufactures a wide line of temperature-control products ranging from freezers to ovens, as well as a variety of centrifugation products. The company has been a competitor to Thermo in the drug-discovery technology and bioprocessing markets.

In a teleconference with analysts and investors last week, Marijn Dekkers, Thermo Electron’s president and CEO, declined to provide a closing date for the purchase.

“The regulatory review process typically takes from two to six months,” he said. The company will file for regulatory review in several jurisdictions, he said.

But David Burden, an independent consultant and president of BT&C Inc. of Bridgewater, NJ, said that the acquisition could potentially allow Thermo to monopolize the freezer market, specifically that of minus-80-degree freezers, which are used for the long-term storage of samples in the clinical and academic sectors.

“I’d be surprised that the SEC would let this happen,” Burden told BioCommerce Week. “When Thermo buys Kendro, they cover the entire market on freezers and incubators. Kendro would look at Thermo as its leading competitor on incubators. Thermo would look at Kendro as its leading competitor on freezers. “[With the acquisition], that is all erased.”

Dekker declined to comment during the conference call about regulatory review for the transaction under the US Scott-Hart-Rodino Antitrust Improvement Act of 1976.

“I’m not going to speculate about the regulatory process,” Dekkers said

Thermo did not return BioCommerce Week calls requesting comment.

Kendro’s Revco brand is considered the premier freezer for the minus-80-degree sector and sells broadly to laboratories, and even savvy restaurateurs, said Burden.

“When the Iron Chef [Masaharu Morimoto] bought his restaurant in Philadelphia, he bought a Revco freezer to store his tuna,” said Burden, who, in a consulting engagement, served as acting vice president for sales and marketing for Revco Technologies from 1996-1999.

Burden said he considers the ultralow-temperature freezer market, including liquid nitrogen storage, to be worth some $120 million a year overall.

While the two companies are competitors, they do have links. Marc Casper, Thermo’s senior vice president, and president of the company’s life and laboratory sciences group, formerly was Kendro’s CEO, joining Thermo in 2001 despite operating under a Kendro non-compete agreement until December 2002. According to a Thermo statement announcing Casper’s hire, he was prevented from taking part in any decisions involving Kendro competitors Thermo Forma or Thermo IEC until the agreement expired.

Home in Bioscience Unit

The Kendro business would be folded into the Bioscience Technologies segment of Thermo’s Life and Laboratory Sciences business unit, Thermo said. The Bioscience Technologies segment, which focuses on the sample- preparation portion of the laboratory workflow market, includes instruments, consumables, and robotics products. According to SEC documents, the division’s products include: cell culture incubators, ultralow-temperature freezers, a range of centrifuges (from microcentrifuges to floor models), centrifugal vacuum concentrators, biological safety cabinets, cryopreservation storage tanks, laboratory freeze-dryers, baths, and ovens. Thermo Forma sells freezers and incubators, and Thermo IEC sells centrifuges.

“The customer base [of the two companies] is very similar, and includes pharma, biotech, life sciences research, and clinical applications, said Dekkers,

Kendro is the largest unit in SPX’s life science business, and, according to SEC documents, generates approximately 50 percent of its revenues from markets outside the United States. Kendro provides sample preparation, processing, storage and lab application products and services, and its brand names include Revco, Sorvall, Heraeus, Harris, Jewett, Puffer Hubbard, Queue, Carr, Lunaire, Tenney, and Blue M. It also has a services segment that offers integrated validation services, biorepositories for sample storage, and laboratory relocation management.

Sales Channels

For Burden, the way each company sells is the key to understanding the implications of the acquisition.

“When Thermo buys Kendro, all of a sudden, they have a huge channel that goes through distribution,” he said. “They would cover the entire market on freezers and incubators.”

Kendro currently distributes its Revco products through Fisher Scientific and VWR Scientific Products, and its Heraeus brand through representatives, while Thermo has a large direct sales force as well as distribution agreements.

The combined companies will continue to use all these distribution channels, Casper told analysts in the teleconference.

Geographically, Kendro has a larger presence in Europe, while Thermo is larger in Asia, said Dekkkers.

“Both have a nice global footprint,” he said.

The Financials

According to SEC documents, SPX’s technical products and systems, the business unit that houses Kendro, had revenues of $1.2 billion in FY ‘03, up by $138 million, or 12 percent, over FY ‘02, according to its last year-end filing with the agency.

Thermo’s Life and Laboratory Sciences unit recorded revenues of $1.3 billion in FY ‘03, compared to $1.2 billion in FY ‘03.

Organic growth for Thermo and the Kendro unit was about 4 percent in 2004, Dekkers said, adding that both businesses were seeing “recoveries” in revenue growth over 2003.

Thermo CFO Pete Wilver said that Thermo is acquiring some $375 million in estimated FY ‘04 revenues with Kendro. Thermo expects to take a first-year restructuring charge of $10 million to $20 million for the acquisition, he said. The restructuring charges will total some $25 million to $30 million over three years, but the added cash stream from the purchase should also increase Thermo’s $1.5 billion fund for acquisitions.

Thermo is taking a $600 million bridge loan from JPMorgan Chase Bank and JPMorgan Securities to initially finance the acquisition.

Thermo’s rationale for the acquisition, other than the increased cash flows and earnings it hopes Kendro will generate, is to expand its product portfolio, Dekkers said.

“We want to create more integrated solutions; that is a key part of our acquisition strategy,” he said. “This is just another step in that process. It expands our capacity to do sample-prep storage and adds more capacity to our lab services, and the financial combination is attractive.”

The companies will create a team for the integration and the brand would begin a transition to the Thermo brands umbrella.

Dekkers said there would be some consolidation in the sales force, accelerating in the second and third years of the integration.

“We won’t rationalize the products, but new versions would combine the best of both companies,” Dekkers said.

SPX, an industrial products conglomerate, acquired the Kendro Laboratory Products business when it bought General Signal in 1998 in a $2 billion stock-and-cash deal. Kendro then was a $75-million-a-year business called Revco, for Refrigerated Equipment Vending Company, according to the SPX website.

The Kendro business has grown through the acquisition of H & P Labortechnik (sterilizers, stirrers), DataCentric Automation (protein crystallization systems), and Medical Air Technology (safety cabinets, laminar flow booths), according to Hoover’s business reports.

— Mo Krochmal ([email protected])

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