A proposed transaction between Johnson & Johnson (JNJ) and The Carlyle Group is viewed as strategically sound, according to Fitch Ratings. Fitch believes the margins and long-term growth opportunities for this business had been lower versus those for the total firm. While the sale will incrementally improve JNJ's total profitability, it should only modestly reduce the diversification of its portfolio, given that the diagnostics business accounts for roughly only 2.7% of total firm sales.
JNJ this week announced that The Carlyle Group has offered to buy its Ortho-Clinical Diagnostics business for $4.15 billion in cash. The transaction is expected to close mid-year 2014, assuming various regulatory approvals and stakeholder agreements. JNJ had previously announced that it was evaluating strategic options for the business.
JNJ had roughly $25.2 billion in cash and marketable securities and a net cash position of $10.1 billion at Sept. 30, 2013. In addition, leverage (total debt/EBITDA) for the latest 12-month period was 0.65x. As such, Fitch believes the company has solid liquidity and ample discretionary headroom regarding how it uses the anticipated proceeds from the transaction.
Fitch believes JNJ, as well as other large branded pharmaceutical firms, will continue to strategically evaluate their portfolios. We anticipate that other potential divestitures in the sector will be generally neutral to ratings, as the possible reduction in portfolio diversification will be mitigated by the prospects for improved growth and profitability.
Fitch's issuer default rating for JNJ is 'AAA' with a Stable Rating Outlook.