FTSE 100 share Smiths Group (LSE: SMIN) is down by almost 10% so far this week. This drop seems to have been triggered by Monday’s news that the company has agreed a $2.5bn deal to sell its healthcare division, Smiths Medical.
This split has been expected for a while and should leave this engineering group more focused on its industrial technology businesses. But shareholders don’t seem entirely happy. In this piece, I want to find out why the Smiths share price is falling — and whether I should buy the stock.
Smiths Group has agreed to sell its Smiths Medical business to US private equity group TA Associates for $2.3bn (£1.7bn), plus a further $0.2bn dependent on future performance. Smiths will also retain a 30% stake in Smiths Medical, giving it the opportunity to benefit from future growth.
Shareholders are expected to receive a “significant” amount of this cash, although Smiths Group plans to retain some of the money to invest in the growth of its remaining businesses.
Management says that this deal is better than any of the other offers it’s received for Smiths Medical. However, Smiths’ falling share price suggests to me that not all of its shareholders agree with this view.
Why are Smiths shares falling?
The Smiths Medical deal was announced after the London market closed on Monday. So the 8% fall seen on Tuesday morning represents investors’ initial reaction to the sale. It’s quite a big drop for a FTSE 100 share — why aren’t shareholders happy?
I can see a couple of possible explanations. Investors may think Smiths Medical is being sold too cheaply. I’m not convinced of this. The medical business is being sold at a valuation of 9.7x EBITDA earnings. This seems fair to me, given recent slow growth.
Another possibility is that shareholders are disappointed that management has ruled out the idea of floating Smiths Medical as an independent business. I have more sympathy with this view. If I was a Smiths shareholder, I might have been interested in owning shares in Smiths Medical. I believe it could have long-term growth potential as an independent business.
Should I buy this FTSE 100 share?
One thing I’m sure of is that getting rid of the medical business is the right decision for Smiths. It just didn’t really fit with the group’s remaining operations, which all have a more industrial focus.
For example, Smiths’ companies make airport security scanners, industrial gas leak detectors, and hoses and connectors for gas and aerospace applications.
My sums suggest that the profitability of the remaining group could improve when the medical business is sold. I’d also expect the tighter focus to make it easier for new CEO Paul Keel to generate fresh growth.
Smiths has been on my watch list for a while. I’ve not bought the stock because I’ve felt it was a little expensive, given the group’s fairly average profit margins. If profitability improves — or the shares fall a little further — I may consider buying. Right now, however, I’m not quite convinced.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.