CSL To Benefit From Consolidation In US Blood Products Sector

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The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

Blood products group CSL ((CSL)) has been involved in attempts at industry consolidation via a previous failed bid for competitor Talecris, but this time it will be watching from the sidelines as Grifols of Spain has reached agreement to acquire Talecris for US$3.4 billion.

Credit Suisse notes the completion of the proposed deal would create a larger third player in the US market, the positive being it would also add to industry stability given more of the market would be controlled by fewer players.

Credit Suisse estimates market shares post a successful Grifols/Talecris tie-up of 38% for Baxter, 29% for Grifols and 28% for CSL. This compares to current shares of around 23% for Talecris and 6% for Grifols.

As well, Credit Suisse sees the Grifols/Talecris deal as increasing barriers to entry for smaller players looking to enter the market, so there should be some flow through positives for CSL in its view.

The deal is no certainty to proceed as Federal Trade Commission approval remains a hurdle given there would be greater market concentration, which was also a major concern with CSL's attempt to acquire Talecris.

In terms of any direct impact on CSL, Credit Suisse suggests it is too early to make any changes to its forecasts as the deal remains some way from regulatory approval, let alone completion. The broker retains its earnings per share (EPS) forecasts for CSL of 186.1c in FY10 and 184.2c in FY11.

These numbers are a little below the EPS forecasts of GSJB Were, which stand at 188.2c in FY10 and 197.4c in FY11. The issue for CSL in Were's view is recent fundamentals in the plasma market have weakened of late, given a lack of clarity with respect to supply and demand and pricing dynamics.

This leads Were to suggest a cautious stance on the stock is justified, as earnings risk for both FY10 and FY11 is neutral to slightly negative at present given the current conditions. BA Merrill Lynch agrees there is some downside risk to forecasts in FY11, thanks in part to currency movements.

As noted by Macquarie, CSL is currently trading at a premium to the deal metrics implied in the Grifols offer. The greater stability in the US plasma industry likely to stem from the deal going some way to justifying this in the broker's view.

A similar point is made by UBS in that the deal, if approved, should be a positive for industry sentiment generally. In the previous cycle UBS notes improved sentiment became apparent in terms of share prices of those in the industry within 12 months of key acquisitions.

With FY10 earnings likely to meet or beat expectations in UBS's view there is no change to its Buy rating on news of the Grifols offer for Talecris. Citi also remains positive on CSL post news of the Grifols proposal as it expects CSL to benefit not only from the fact there would be less large players in the industry, but also from less new manufacturing capacity being introduced.

The other point is Grifols will be spending a lot to acquire Talecris, meaning it won't have as much money available to spend on trying to take market share from CSL for some time.

The FNArena database shows CSL is rated as Buy and Hold five times each, Macquarie one of those to rate CSL as Neutral at current levels. This rating is based on EPS forecasts of 188.4c this year and 196.2c in FY11, these having being revised slightly lower to reflect changes to currency forecasts.

Consensus EPS forecasts for CSL according to the FNArena database stand at 188c in FY10 and 199.6c in FY11.

The average price target for the stock according to the database is $37.89, while shares in CSL today are higher and as at 11.10am the stock was up 39c at $33.24. This compares to a trading range over the past year of $29.27 to $37.56 and implies about 14% upside to the average price target.

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