DENTSPLY International Hit With Upgrade At Baird: Analysts See Long-Term Merger Benefits

• DENTSPLY International Inc XRAY shares are down 7.24 percent since August 18, when they touched a high of $57.45.
• Baird’s Jeff D. Johnson upgraded the rating on the company to Outperform, while raising the price target from $58 to $61.
• Terming the planned deal as a merger of equals, Johnson said he expects it to have a positive long-term impact.

Analyst Jeff Johnson mentioned that the planned merger of DENTSPLY International and Sirona Dental Systems, Inc. SIRO looks disappointing on the face of it. The merger is, however, expected to result in solid cash flows, increased balance sheet optionality and longer-term potential access to DSOs for Sirona over the longer term.

Terming the proposed deal as a merger of equals, Johnson said that it made sense, as the deal would provide DENTSPLY access to digital technology while offering Sirona a chance to dampen its cyclicality, besides better offering access to its “OUS cash flow.”

Johnson believes that the deal will position the merged entity strongly by offering numerous cross-selling opportunities by blurring the lines between dental consumables and equipment. The merger is also expected to result in greater balance sheet optionality, as free cash flows are expected to exceed $600-$700 million by 2017.

Moreover, access to cash for debt pay-down or share repurchases becomes easier, the Baird report noted. DENTSPLY’s growing capabilities to curtail costs and the EBIT synergies from the merger are expected to lead to consistent margin performance by the merged entity, Johnson added.

“We see a combined mid-single-digit revenue/low double-digit EPS grower going forward in Dentsply Sirona, with potential upside to both with additional deals and/or balance sheet utilization. While maybe not eye-popping numbers, we believe such growth and presumed consistency should make XRAY a core medtech holding over time,” Johnson commented.