Cochlear has paid approximately A$170 million for the hearing implant division of Danish hearing aid manufacturer, Demant. We understand that Demant approached COH to ‘rescue’ its troubled Oticon business which has struggled to build scale in its two key products. Oticon makes a bone-anchored hearing aid (BAHA) and a cochlear implant which has all but closed after receiving a product recall in October 2021. COH will not be assuming any liability for issues that may arise from this product recall.
Oticon is not currently profitable, but COH is expected to retain most of the current sales (around A$75-80 million) whilst turning around the business over the next 18 months or so. By then it should be achieving 18% net profit margins similar to COH if successful. COH can eliminate some duplicated costs such as R&D, sales, administration and marketing. There will be a one-off integration expense of $30-60 million.
Investment view
Oticon has enlarged COH’s installed customer base across both of its key products.
COH is expected to continue the Oticon BAHA product making COH the sole global provider of BAHA systems. The Oticon cochlear implant product will be discontinued as it only held about 2-3% market share and is under a product recall. COH may have already absorbed the majority of market share from this product adding to its 60% global market share.
COH will continue to service the existing customer base with a sideways compatible hearing processor. The development of this processor is likely to make up the bulk of the integration costs. Oticon has around 75k customers in need of continuing care for their hearing implants so the acquisition by COH has an ethical angle to it as well as commercial. Advanced Bionics is mired in its own device failure issues leaving COH as the only company with the means to step in and help Oticon patients.
COH has acquired Oticon on a very modest multiple of about 8.3x FY24f EV/EBIT. Assuming COH can turn the business around to its own trading multiple around 32x, this will add approximately $475 million of value to COH.
Risks to investment view
If COVID restrictions persist, it could affect growth in industry implantation and other services. Two competitors have product recalls underway and any market share recovery might impact COH. There is always the presence of technology risk in this industry, so COH must maintain high standards in its product development.
Recommendation
We have retained our Buy recommendation.
