Sounds like competition

23 Jun 2023

Sector: Health Care

UK REGULATOR BLOCKS ACQUISITION

Need To Know

The UK Competition and Markets Authority (CMA) blocks the Oticon merger in its current form
Bone Anchored Hearing Aids (BAHA) competition is the key concern, with the CMA stating that post-acquisition, COH would have a monopoly in this market
COH essentially gets the Oticon Cochlear Implant (CI) business for free, but it is loss making and the LT opportunity outweighed the $170m purchase price, leading to minor (<2%) earnings and valuation downgrades

The UK competition regulator has blocked COH’s A$170m Oticon merger in its current form. The regulator concludes that Oticon’s CI business does not raise concerns and it will allow the acquisition, however the BAHA business would lead to a substantial lessening of competition. The ACCC and European commission have not finalised its views, seemingly waiting for the CMA opinion. We assume they will reach the same conclusions.

The deal has now been altered seeing the original purchase price of $170m slashed to $0, with COH taking on the loss-making CI business. The CI business makes ~$10m in revenue largely from processor upgrades, however COH should be able to improve performance with sub-scale operations being a key factor in its unprofitability.

COH have stated it will need to spend between $30-60m to modify its current processors in order to provide upgrades to the ~20k people that have the old Oticon implant. COH expect the acquisition to complete in 2H23.

Investment View

The LT opportunity in the Oticon acquisition was likely to outweigh the upfront $170m purchase price, which has led to minor (<2%) downgrades to COH’s future earnings and valuation.

COH’s continued market leadership should see it retain and grow its market share. Key product innovation will sustain earnings upgrade momentum for COH. Whilst it is expensive at ~45x PER, we consider COH a long-term holding and we retain our Buy recommendation.

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Stock Overview

Share Price

Company Overview

Cochlear is a global leader in implantable hearing solutions. The company produces cochlear implant systems, provides services (sound processor upgrades) and acoustics systems (bone conduction systems).

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