Biotech Values

[DewDiligence]

ARAY Acquires TOMO for $277M in Cash and Stock

[The deal has a nominal value of $4.80/sh, a 31% premium to TOMO’s closing price on 3/4/11.]

http://online.wsj.com/article/SB10001424052748703386704576186171678871798.html

›MARCH 7, 2011, 3:51 P.M. ET
By JON KAMP

Accuray Inc. agreed to acquire TomoTherapy Inc. for about $277 million in cash and stock, combining two providers of radiation systems for cancer treatment in a deal that will nearly double Accuray's sales.

Under the deal, TomoTherapy shareholders would receive $3.15 in cash and 0.1648 share of Accuray common stock for each TomoTherapy share they hold.

Accuray is betting it can make TomoTherapy profitable while helping turn around what has long been a money-losing business for servicing machines.

The two companies make different types of cancer-treatment systems that Euan Thomson, Accuray's president and chief executive, said are complementary. "The level of competition at a patient level is fairly low," he said during a conference call Monday.

Accuray expects the deal will damp its earnings in fiscal 2012, which starts in July, but will add to its earnings in the following fiscal year. The deal is expected to close in the second or early third quarter this year, subject to approval by regulators and TomoTherapy shareholders.

In midday Nasdaq trading TomoTherapy shares were up 25% to $4.57 while Accuray shares slipped 9.8% to $9.03.

The combined company would have an installed base of more than 550 units in 32 countries and more than 1,100 employees. The companies last year reported more than $400 million in combined revenue, 30% of which was generated from servicing the installed base.

Accuray expects TomoTherapy's service business to turn profitable in the fiscal year that starts in July 2012. That business has been a drain on TomoTherapy's results for several years, due mainly to the frequency of repair visits and associated costs, but the companies have various plans in place they hope will turn that around.

William Blair analyst Ben Andrew said the service function "will have materially better scale, and thus should become profitable relatively quickly, whereas TomoTherapy was working hard to reach profitability for that function with its smaller installed base."

He also said the deal should allow for "numerous operating efficiencies and cost synergies," but said the price tag for TomoTherapy was at the low end of what he would have expected. "We believe that Accuray is getting a great deal," he wrote in a research note.

The deal includes an $8 million termination fee that TomoTherapy would have to pay under certain circumstances. Alternatively, the company could have to pay as much as $1.5 million if it or Accuray called off the deal under certain other circumstances, but TomoTherapy wouldn't have to pay both amounts, according to a regulatory filing.‹