Danaher - Exceptional Capital Allocation With A Focus On Life Sciences.pdf

Danaher is a specialized platform investment company listed on the New York Stock Exchange, comprising five platforms and four operating segments, including dental, with 20 companies running autonomously. The company's core competency is capital allocation, and its strategy is to target areas of the market with high growth and recurring earnings. Danaher's approach to business is defined by its business model, Danaher Business Systems (DBS), which enables sustainable growth and profitability through a virtuous cycle of improvement.

Danaher has a history of exceptional capital allocation, with 80% of available capital allocated to M&A, 12% to capex, 5% to dividends, and 3% to share repurchases, funded 94% from operating cash flow. The company has acquired hundreds of businesses since 1994, with more than half of current revenue coming from businesses acquired in the past seven years.

Danaher is in the process of buying the Biopharma business of GE Life Sciences for $21.4 billion, which will increase their exposure to the Life Sciences market segment and be growth and earnings accretive. The group has a strong organic growth profile, good profitability, and participates in large and growing markets, with a current combined addressable market of $135 billion.

The company's focus on Life Sciences shows promise, with the market growing at high single digits and Danaher maintaining a 13% market share, leaving room to consolidate and grow above the market rate. Excluding Dental and including the GE Biopharma purchase, Life Sciences and Diagnostics make up approximately 79% of current revenue, up from 56% in 2014.

However, the size of the GE Biopharma transaction brings some risk into the equation, as a significant amount of debt is required to finalize the transaction. Northstar has reduced the position in their funds, reflecting the increased risk in the business. Despite this, the company's strong free cash flows are expected to enable Danaher to reduce debt over a reasonable period.

Northstar's assessment of value allocates no value to future acquisitions in the base case scenario, but recognizes the founders' demonstrated skills in capital allocation and models potential future acquisitions scenarios in the bull case scenario. Danaher remains a core holding across Northstar global strategies, with a defensive nature and durable and attractive fundamentals. The company trades at a discount of 18% to Northstar's base case valuation scenario and an even steeper discount to the bull case scenario.