Welcome to the Getinge Group teleconference. Today's conference is being recorded. At this time, I would like to hand the conference over to Johan Malmquist. Please go ahead.
Oh, thank you so much, and welcome to all of you. This is, of course, the conference call connected to the announcement that we made earlier today. I have my colleague, Ulf Grunander, with me, and also Alex Myers, who I think some of you have met, and who is the head of our Extended Care division. We're a little bit in different time zones. Alex and myself, we are in San Antonio, and Ulf is in Getinge. So, if there are any communication issues, that may be the reason. The presentation we have here is supported by a slideshow that you should have been able to access if you followed the instructions in the press release, and we obviously intend to follow that format.
Just by way of a sort of first comment, I think that a number of you would be, well aware of, this transaction. I think this transaction should not come as a surprise since this is a company that we have talked about for some time. And I also think it's been public knowledge that the owners of this business had put it up for sale in the market a while back. So with that, I suggest we move into the slide called Transaction Overview. And so we have, yesterday night, actually signed a definitive agreement, with KCI or Kinetic Concepts, to acquire the TSS business, which is the name of the Support Surfaces business, for an enterprise value of $275 million. And, it's worth noting that this is a so-called carve-out.
It's actually, so it's not a legal entity where we purchase the shares, but we purchase all the related assets, both material and immaterial assets that are connected to this business. And if you translate this, asset value on a debt-free basis, relative to the EBITDA that the company made in 2011, you come to a multiple of 5.7x. Because of the nature of how this deal is structured, that we're acquiring the assets, this means that the goodwill that is, or the overvalue is created, are fully tax-deductible, so this will create a tax asset of $30 million. And if you further adjust for that, the multiple would come down to just over 5x. So I think it's a very decent price that we've paid for this asset.
If you move to the next page, on the reasons behind this transaction, this is a business that is very complementary to our existing support services business within our Extended Care division. If you look, I would say, across all of the different dimensions. Geographically, TSS is very strong in North America, with approximately 60% of the revenues there, or US, to be more specific, and our own business is very strong in the Western European territories. We can also see that we are, the TSS business has dealings with slightly higher acuities, whereas I would say that our own business, is operating more on, on a general level with the treatment of pressure ulcers through our products.
And we can also see that the technology is deployed, and there are largely two technologies used to treat and prevent pressure ulcers, and one would be the Low Air Loss technology, which is used by the TSS business and generally by US companies, and the Alternating Pressure methodology here called AP, which is where Huntleigh and a majority of the European operators came from. Both has their strong relevance in this market, and both work on patients, but on different patient populations. We move on and look a little bit more specifically on the business, on the TSS business. It is one of three divisions within KCI, which has been focused on this specific segment, the wound care. The business is based in San Antonio, Texas, where the principal manufacturing facility is also.
They have own proprietary sales organizations in United States, in Canada, Germany, Australia, Switzerland, U.K., and France. And, as I said before, U.S. is a stronghold. Canada is, of course, also significantly better than our own position. Germany has been a very good market for them, where we are a little bit weaker. The same would go for Australia and Switzerland, a little bit weaker in U.K. and France. As I said earlier, 60% of the revenue base in the U.S., 40% in the rest of the world, and more specifically, 30% in Western Europe. And the exact level of revenues in 2011 was $247 million, and the product range is relatively compatible with our own.
In fact, the KCI business or the TSS business also recently acquired a business that is active in the patient mobility market, which in our own terminology, would be called a patient handling product. There is approximately 1,300 people engaged in this business. If you continue to the next slide, you will see also the breakdown of the revenues into the three categories. What you see here on the left, the wound care, is what I would say is rather equivalent with our own existing therapeutic services business. Whereas, what is likely unique to this business is, on the one hand side, the strong exposure to the bariatric market, which is a very dynamic and definitely a market segment that grows above the average of the therapeutic services market.
The company also has a very strong presence in the Critical Care segment and where the product, in addition, very often to dealing with pressure ulcers, also has the ability to deal with respiratory disorders. So moving over to the next slide, and this is, again, just a reminder about this market that is believed to be valued at about $1.5 billion and growing globally by 5%-7%. US market, a little bit more mature, probably around a 2%-3% growth. But the company in question is extremely well entrenched, and I would say if you talk about therapeutic surfaces, people would probably spontaneously mention the TSS business here and the Hill-Rom business, in this segment, at least if you're talking in the United States.
And again, I think this is a business, specifically on the bariatric side, that is very well positioned in these times and days. And also, I think it's worth mentioning that pressure ulcers in a U.S. context today is a so-called Never Event, and that means that if a patient would develop a pressure ulcer while hospitalized, the cost for the treatment of that patient would not be covered by reimbursement. So hospitals in the United States, and also elsewhere, but specifically in the U.S., are very sort of mindful about the management of pressure ulcers. So the final slide then on synergies and financial impact, and after that, we'll open up for your questions.
I'm pretty sure that you can imagine that we will have strong synergies across the whole spectrum of things that will now be pulled between the two companies in sales, obviously in distribution operations, manufacturing, and certain central functions. I also think that the complementary nature of our two product portfolios will actually allow us to penetrate both the markets in Western Europe and the markets in North America significantly better than we've done in the past. This deal will be accretive to Getinge from 2013 onwards, and that includes all sort of charges. That includes the cost of the financing of this specific deals, that includes the amortization of any of the overvalues created, and it also includes those restructuring costs that are likely to fall into 2013.
Because, as you can see, we estimate that the transaction and restructuring costs will amount to about $35 million. Some 25 million of those dollars, $25 million, will be charged into the fourth quarter of this year as we close the transaction. And the remaining 10 million would then go into 2013, the 10 million I referred to earlier. This transaction will be subject to competition authorities in different geographies, and that is also why, going through these formalities, we think that the deal is likely to close somewhere in the second half of the fourth quarter, but we will obviously go on as quickly as we can. And finally, the financing of this deal will be through a bridge loan with one of our existing banks.
So, there shouldn't really be anything stopping us from going through with this deal. So, with that, I suggest that we open up for any questions that you have. Operator, if you could assist us with that.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. Please ensure the mute button on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has been answered, you may remove yourself from the queue by pressing star two. Again, please press star one to ask a question. The first question comes from Michael Jüngling from Morgan Stanley. Please go ahead.
Great, and good morning, everyone. I would like to ask three questions, please. Firstly, can you give us a sense of what the organic constant currencies sales growth numbers are for TSS in 2009, 2010 and 2011? If I go through the KCI filings, it seems it's been a business in decline, but I can't fully adjust for currency or acquisitions. On TSS EBIT margins, they also seem to be declining over the last three years. Is that correct, and why would that be? And then finally, on synergies, could you perhaps be a bit more precise as to what synergies you could achieve in 2013 and 2014, and where would those synergies come from? That's all. Thank you.
Well, thank you, Michael. I think we, some of the questions, I think, that you and others can, as you also suggested, access yourself, and, and some of them is a little bit early days. But, the TSS business has been a business in, decline within, the KCI, and, and I think this is also one of the reasons why this business is up for sale. And, so were you to go back to the years of 2009, 2010, and 2011, you would see that there has been a, a steady downward trend, in the top line. And, we have done relatively extensive due diligence on this company, and we have—it's a company also that we meet on a frequent basis in the market, so I think we know them.
The decline has had nothing to do with sort of the product strength of the business, or I would say, the way that the TSS staff addresses the market. But it's very clear that from the day that KCI, which was predominantly the TSS business going back a few years, introduced the V.A.C. product, the focus of the organization very, very quickly moved away from therapeutic surfaces to the significantly faster-growing V.A.C. You could see that particularly in the markets outside of U.S., where you saw early decline because those smaller organization where they diverted basically all of their attention to the V.A.C. therapy. No surprise, the TSS business declined because there were other people, like ourselves, highly focused on this segment.
The second one I would say, is that there has been a series of restructurings of the rental structure. And since these products are rented to customers, they rely on a structure of depots within close proximity to your customers. And many of these products are sort of available 24/7, and if a patient comes in critically ill, you'd like to see the mattress under the patient within maybe 2-4 hours. And in those restructurings, they have cut back on rental depots. That means that successively customers have found themselves receiving not the quality or service or the responsiveness that they have been used to historically. And other competitors with depots with better location relative to those customers have been able to serve them better.
So I think those are the two principal elements. So we come now with a, how can I put it? With a portfolio of depots ourselves. But secondly, we can ensure that the depot structure is focused exclusively on our customer base and isn't necessarily sort of a compromise between where the VAC customers are and where the TSS customers are. So, I'm very confident that when it comes to the top line, this is where we need to bring change and where we will bring change to this business. And the decline in the EBIT margin or the EBITDA margin or whatever, is no more than sort of a consequence of what has happened on the top line, in this business. Synergies, I think it's a little bit early.
I mean, we obviously have working documentation, but when you acquire a business, and we will still be in a situation where we are, if you will, engaged to get married. So we've signed a definitive agreement, but we haven't paid for the company. And what we think is the right thing for us to do now is to sort of engage in dialogue with the other side and jointly sort of establish what are the essential elements of the synergies. And there will be more information forthcoming on this subject here over coming months. So I'd like to park that one a little bit. But I think with sort of in the language, you will see that it is sort of instantaneously accretive in 2013.
I can assure you all that this is a transaction with a strong value creation, as we look at our math in this deal.
Perhaps I can ask a follow-up question on TSS. How long do you think it will take you to allow this business to grow again organically? And is your current Extended Care margins a bit of a guide as to what TSS could achieve in the coming years?
Well, well, firstly, I think there is to answer it. I think that we would look to stability now as we speak, in the second half of this current fiscal year. And then we would aim for a modest single digit organic growth in the next year. And I think that revenue synergies, my experience, is not sort of the first thing that sort of hits the business. I think that we would maybe look to see a gradual improvement in organic growth of the business moving into 2014 and 2015, as sort of the more tangible revenue synergies kicks in. And can we take it to the average of the Extended Care group?
I think over time, we could get there, but I can also say that in our calculation, that is not the assumption. And with that assumption, it's still a highly accretive transaction for Getinge Group and for Extended Care. So again, I think it's of a size that it could sort of have some impact on the margin, but I would suspect that when we come back, I don't think that we're gonna sort of alter the margin outlook for Extended Care overall because of this transaction, which maybe gives you some insights to our thinking.
Great. Very helpful. Thank you.
Thank you, Michael.
The next question comes from Klaus Madsen, from Handelsbanken.
Yes, hello. It's Klaus Madsen from Handelsbanken. Most of my questions were answered, but just two brief follow-ups. First of all, could you reveal the underlying EBIT margin in the TSS business in the first half of this fiscal year or calendar year. And also you allude to a slight margin dilution in the Extended Care business. Would that in any way affect your 2013-14 margin ambitions for the group?
Yeah, I know. I think I said that, I think on, on your, answering your second question first. I don't believe that we would, that the, the sort of the size of this business relative to the overall size, I think we would be discussing tenths of percent. I think that this will not alter our view of sort of reaching the overall corporate margin targets and in the timeframe indicated. When it comes to the, the underlying margin, I'd like to pass on that question, on where it was, in the-- because this, this again, is a carve out, so things depends highly on, on how you look at cost allocations and the likes for this business.
So it had this been a standalone legal entity operating, I think it would have been a little bit easier, at least, to answer some of your questions. In fact, I think you would have been able to access some of this information from the historic 10-K filings of the KCI Corporation.
All right. Thank you.
Thank you.
The next question comes from Scott Bardo from Berenberg Bank.
Thank you very much for taking my questions. So, first question is, is there any sizable R&D component for TSS? Historically, you have taken a slightly different accounting process in capitalizing and expensing R&D. I just wonder what you see in your first year of consolidation in terms of EBITA margin for this business in the way that you would typically capitalize your R&D expense. So that's the first question. Secondly, in terms of distribution and manufacturing, I understand that the business currently has over 100 service and distribution centers. I just wondered if you could help us understand what your intentions are with the distribution and manufacturing channel. Do you simply adopt the existing structure?
Can we see some sourcing and transfer production to low-cost countries, which Alex has quite successfully done in the past? So just maybe a little bit more understanding on that, please. So they're the first two questions. I have one follow-up.
Okay. Well, thank you, Scott. Yeah, I mean, this, I think, I know maybe you can help me out here on the R&D side, but I would think that we're talking about an R&D spend to revenue somewhere around 3%. Would that be accurate, Ulf, today?
That's correct. It has been in the past, around $7 million-$8 million, which is around 3%-4%. That's correct. I believe that we probably need some more time to look into that, but maybe half of that could be capitalized going forward.
Mm-hmm. And then on the, and I would say, Scott, and I'm not trying to dodge it, but I think we are now moving into a phase where we enter into dialogue with the operatives of the other side, right? And to figure out ways we can sort of jointly make ours and theirs TSS business more effective and find ways of improving our competitiveness. And for that reason, I don't have any specifics, but I think I can assure you that we will look over the different items or the full value chain to see what can be done.
And I think I'm right in saying that we have made some very good advances within Extended Care when it comes to improving our supply chain over the past 3-4 years. So I actually think that we have quite a lot to bring to the table, to the TSS business. But I can assure you all that we will be back with more specifics, but once we have established that joint plan. Right now, when I say that this is a very, very accretive deal, it's based on I think some very realistic assumptions, but it's still things that we would like to engage in dialogue with the other side before we sort of divulge it to the capital markets.
Thanks very much, Johan. Just a quick follow-up. You say it's a very, very accretive deal, and we don't really know what margins the business will be coming in at, as consolidated in the Getinge. Can you at least help us understand what your current bridge loan financing terms are, so we can get a sense of how accretive this deal might be? And last question is just on geographic mix. Thank you for giving us the split of North America and European business. Can you help us understand what the dynamics have been in these geographies and what your expectation is going forward? I understand that the business has been particularly hit in the US over the last few years.
Do you expect this trend to continue in growth in Europe or a similar growth dynamic for both regions? Just a little bit more color would be helpful there. Thank you.
Yeah, I'll move into that question. I think the 5%-7% that you see is over a spectrum of applications, right? Or where these products are being sold. And I think if you do one sort of breakdown of the market, would be to talk in terms Long-Term Care or say Long-Term Care facilities and the hospital environment. And if you look at those two segments, you can say that Long-Term Care environment has been more dynamic than the hospital environment. And the simple reason for that is that the maturity of the hospital market is a lot higher, and the market penetration is a lot higher.
The interest from Long-Term Care market and the growth in that segment has been sort of both in, in or specifically North America, more in the 5%-7% over the last few years. The products that we offer from our existing business are much better sort of tuned to that market than the product range that KCI or TSS has. I think that is one element. If you look at the dynamic sort of, of the more, or sort of, of the rest of the market, then I would say that the European market has probably been a little bit better than the U.S. market.
And again, it's mostly because of the level of penetration, which is a lot higher in the U.S. than it is in other parts of the world. I think this, what I mentioned before with the depot structure, I think is an essential element for why TSS has underperformed the rest of the therapeutic services market in the U.S. And I think that when you get to Europe, one needs to remember the organization in each country that were busy promoting the therapeutic services on behalf of KCI were not a strong U.S. organization, but relatively small organizations. So when focus was turned to the V.A.C., I think the TSS business actually initially suffered a lot more in Europe than it did in the United States.
Thank you. And just the question on financing terms, so we can work out how potentially accretive the deal is.
This would be Ulf. I mean, we've been—I mean, this will probably be in the sort of average of what we pay for our debt. I would assume a little bit north of 3%, Ulf?
Actually, it's better than that, Johan. It is that we probably going to be a little bit under 3%, which is better than what the average is today when we talk about the financing cost for this deal.
But I think, again, when we say, accretive, I mean, we mean that in the sense of sort of a net present value that wouldn't necessarily require you. So, I mean, there are solid plans for margin expansion and top-line improvement, and the restructuring cost that are allocated to 2013, it would include the financing cost, and it would also include any amortization that are associated with the transaction as such, and then obviously leave a surplus in addition to that. So, that in what would most likely be the very first year, since this transaction is going to happen very much towards the end of the year.
So, I think that is a strong signal on the value we see in this transaction.
Thanks, Johan. So accretive to earnings as well as net present value, just to understand, that was my last point.
I understand, and I've received a couple of questions on the EBITA margin and where it may end up. I think those are details that we need to come back to you with, when we have sort of spent more time with the other side, detailing the exact plan we will have to improve the profitability.
Thanks for answering my questions. Appreciate it.
Thanks, Scott. Thanks.
The next question comes from David Adlington, from JP Morgan.
Morning, guys. Thanks for taking the questions. Just coming back to Michael's first questions about the revenue decline the company's seen for the last kind of 3, 4 years. I presume most of that's come down to share losses. I just wondered who the biggest gainer of that share had been, and how would you—what would you do differently going forward to regain that share? Secondly, I just wondered if you had any plans to move either your business towards a more rental style business or the KCI business more towards a CapEx style business? And assuming it would be the former, and more generally, what implications does this have for your working capital? Obviously, the rental business is more working capital-intensive. Thanks.
Mm-hmm. So your, your, again, back to your first question on how we intend to improve the, the growth going forward. I think we, we have touched on it in, in several bits and pieces over the previous questions. But I think one is, is to ensure that we have an optimized alignment around depot structure and proximity to our most important customers. And, and the other one is to, leverage sort of the complementarity in the product range, because that is new technology that can be offered to existing customers in a very short time period. I think both of those will have sort of a positive impact.
I think on your question around sort of who we had lost market shares to, if you look at the very recent past, I would say I think both of the big guys have had a little bit of a decline in their top line, that I actually think is a little bit market related or a market adjustment. But if you were to go back over the last two, three years, I think us has been a share gainer. If I look at just the last couple of years in the U.S., I would think that Hill-Rom has been a little bit of a share gainer, and then there's probably one medium-sized players in the TSS space that can possibly also have picked up a little bit.
But again, it's not like we have sort of access to sort of data from independent sources, but this would be sort of my assessment. If you go to the breakdown going forward of between renting these products and selling them, I think the way that this business will go, i.e., that it will probably be a continued trend towards more products going into prevention and faster growth on Long-Term Care sector and also maybe customers being financially a little bit more mindful.
I think there's a good chance, and we would sort of promote that as well, that the business would move a little bit more in favor of the sales of capital equipment into the customer base, and a little bit less emphasis on the rental of support services.
Okay. And does that have implications for your margins over time? Because presumably, the rental business is higher margin.
Yeah, it's—I don't think so, no. I mean, rental is, as you said, yeah, high margin, but it all depends on where you are in the cycle and how much you have depreciated of your rental fleet. So, rental has a higher margin, but of course, also significantly higher capital associated with the business. And, but I think that what it is, is that this is also the preference of our customers, and I think this is what we need to respond to.
I wouldn't be unhappy if this market in the future had a different mix of capital to rental, but rental is a very strong platform of this business and a strong platform of Hill-Rom as well, from which there are other interesting things you can do on renting other equipment that are sort of used on a more temporary basis. The reason this is a rental market is foremost because the use of the product is limited in time. You have an intensive care patient only for so long, and once that patient leaves the facility, you do not need that product, that product needs to be decontaminated. So, the rental model has its validity because of the way the market looks.
But in other care settings where people have been renting products more because they had the structure, I actually think the market lends itself better to a capital equipment sales type of approach.
Okay, understood. And then just maybe one final follow-up. This acquisition is very different to the last couple you've made, obviously, more in a medical system side, very obvious growth opportunities. This one's more of a kind of turnaround situation. I think it'd be useful to kind of get your thoughts into what actually attracted you to this business, maybe versus some other opportunities out there with a more growthy focus.
It wasn't anything of an attraction versus something else. It was the thing to do. We have, through two acquisitions, one in 1998 and one in 2007, created a strong position in the therapeutic services market. We have an ambition to be leading in the product segments that we engage ourselves in. When a leading company in the United States come up for sale, I think this is the thing for us to do, and particularly if it sort of meets financial criteria, as well. We have been in dialogue with KCI in one way or another for the past 14 years, with an aim and an interest in acquiring this business.
So, it's not something that sort of we decided when they said, "We're gonna sell this." This has been on our radar screen for a very long time. It's a little bit rounding off the business, if you will. At this stage now, as we talk, the Extended Care business will actually have very solid one positions across the entire spectrum of their technologies and products.
Understood. Great. And then where does that leave us now in terms of potential war chest for additional acquisitions from here?
Yeah, what would you say, Ulf?
I should say that, that this will have quite a small impact to reduce our capacity, because at the end of the year, we will be on the levels when you take net debt ratio with the of something around one, and also to net debt to EBITDA below three. So I think we will more or less have the same capacity, and we have been talking about SEK 8 billion-SEK 9 billion. So I think it will; it's not a big change compared to that.
Great. Thanks very much, guys.
Thank you, David.
If you find that your question has been answered, please press, press star two on your telephone keypad. We'll now take the next question from Patrik Ling from Nordea. Please go ahead.
Yes, good morning, everyone. Johan, could you just help us with sort of a market share breakdown for global therapeutic services? I mean, say, KCI, you, Hill-Rom, for example.
Yeah, it's a... Our revenue base on this business now will be, let me see if I can consult documents here. I have only my mobile office here, but I would suggest that our business will be a little bit under half a billion, say around 450, so $450 million, I would suggest, would be our therapeutic services business. And it's a little bit difficult because in to do the math appropriately when you talk about market shares, because one shouldn't forget that in the on the US side, the therapeutic services offered are very, very often an integral product that you put into a medical bed. So you actually rent out both a bed and a therapeutic surface.
When we look to our non-US market, it's basically a mattress replacement, where you provide a critical care bed on which you put a therapeutic support surface. But if you look at sort of not focusing on that aspect, if we look at the revenue base we have, it will be probably approaching $450 million, and that would predominantly be rentals. If I sort of look to Hill-Rom, I would suggest that that is a number that is probably a little bit higher than theirs. But then when you look at the capital equipment sales, I would suspect that Hill-Rom has a slightly higher ratio of products sold relative to product rented.
But I'd say it's a very close race between us and Hill-Rom for the number one position in this market.
Okay. But if you and sort of KCI and Extended Care therapeutic services, if you have $450 million in global sales, that would be approximately 30% global market share, which in a way is a higher market share number combined than what you have been talking about before. I mean, if you go back a couple of years, just after you acquired Huntleigh, for example, you talked about Huntleigh plus KCI having less than 30%, and that doesn't really add up, given that the KCI have been losing sales over the last three years.
No, and I think that has to do a little bit. I presume we're referring to the $1.5 billion market, right?
Yeah.
The $1.5 billion market, I think, needs to be understood as the specific market that we are addressing. If you look at the wider space of therapeutic surfaces, you have products of a much simpler and easier sort of character across a wider sort of part of the care continuum going into the home care market and other aspects. This is when we talk about at wounds therapeutic surfaces. In this market, this would most likely be the numbers we are talking about. The relevant market that we are buying into and the relevant market that we are addressing today.
Okay. Given discussions that's been out about KCI's being or not being a part of Getinge in the past, would you say that approximately 5% decline per year for the last three years of organic sales is that a reasonable assumption?
For the TSS business?
Yeah. Okay, yeah.
I think in times it has probably been a little bit higher than that, even, and but I think we're seeing a stabilization of the volumes going into this year.
Okay. When it comes to competition authorities, I suppose that the issue will be primarily in Europe. Are there any specific markets where you expect the competition to extrapolate?
Yeah, there are, but I wouldn't—a nd we have thought through our plan and potential remedies, but I actually wouldn't like to go into those details to sort of wake up any sleeping bears.
Okay. Last question, given that this is asset deal, will this have any specific implications on your tax rate? Maybe this is a question for Ulf more.
Yeah, I, I think we commented on it in the beginning, on the tax asset that it generated, Ulf, but maybe for clarification.
The tax rate is a little bit higher, so on 35%, when you talk about this business, but I think in the first two years, it will probably not have any major impact on our overall tax rate, and by no means this year, when we have said 26%. But in 2013, I don't think it either will have a big impact.
Okay, great. Thank you.
Thank you, Patrik.
The next question comes from Daniel Wendorff from Commerzbank.
Yes, good morning, and, thanks for taking my questions. Three, and shorter ones remaining, if I may. I'm starting off with the, with the potential revenue synergies you might generate. Where, in, in what product area and, and which region you would see the, the biggest opportunity, if that's, already possible to comment on at the moment? Second question would be on the recurring revenue base. Can you potentially, comment, already on how, the recurrent revenue base in Extended Care would look like, once, the TSS business is integrated as a percentage of sales of the Extended Care division?... That would be helpful. And lastly, on the purchase price allocation, you commented already on the goodwill, you will take on.
Is it possible already to comment on the tangible asset base you might take on the balance sheet from that acquisition? Thank you.
Maybe you can take the last question first.
Absolutely. Yeah, we had preliminary figures here, and based on what sort of asset we will get in this net asset deal, we believe that the overvalue will be something around $160 million. And if you make your own assumption that how much of that will be allocated to amortizable goodwill, you probably could use something like 40%-50%. And then it's a little bit early to exactly know what sort of economic lifetime those assets will have. Guess is that it will be in the range of 10-15 years. So I think that you would probably add up something that the amortization will be in the range of something like between $7 million-$9 million.
Mm-hmm.
I think on your the question in the middle, Daniel, it's say the recurring revenue base would be approaching 60% of the total revenues of Extended Care. I think on the first one on revenue synergies, I think I'd let Alex comment here since he is with me as well, and quite familiar with the business.
Okay. Hello, everybody, this is Alex Myers here. Yeah, regarding the revenue synergies, the way we see it is, it's we've identified several areas for this, and I would say one of them has to do with channel exposure. And the way we see it is we've had a much higher channel exposure Long-Term Care, as ArjoHuntleigh, and that exposure has been very, very limited on the KCI side. And as Johan also mentioned, that we have Long-Term Care development as a higher growth channel for therapeutic services. And we believe that that can be leveraged much better in the new setup. So, one would be developing Long-Term Care segment.
There also, our portfolio, let's say, the ArjoHuntleigh portfolio, has been skewed, let's say, lower in price ranges, and we've had a portfolio that's more tailor-made to Long-Term Care, with simpler overlays, and a simpler product group, which actually Long-Term Care quite well. So I would say that for that, that would be one area which is actually an ArjoHuntleigh portfolio going into a KCI distribution system, which would be number one. Also in the US, I would say, KCI, one of the gaps that the KCI has had, has been focus on equipment sales.
They've been very, in a way, over-dependent on rental, and there we see ourselves coming in with a with a much more robust, frames, bed frames, category, and a much more robust patient handling. So again, it's also leveraging the ArjoHuntleigh portfolio in the KCI distribution system. The third area then that comes in the other direction is that KCI has had a very strong portfolio in bariatrics, which we have lacked. And that we see as an opportunity both in Europe and the U.S., which is going the other way, that we leverage a KCI segment that we have lacked. And also the other direction is the critical care, where TSS have had a much stronger critical care portfolio, where we've been traditionally weaker.
So I would say on the ArjoHuntleigh side, we've been more, stronger in the, let's call it, the mid to lower part of the range, while KCI has been stronger to the mid to upper part of the range. So I think the combination is very good. But I think we shouldn't forget the actual leveraging of the ArjoHuntleigh portfolio in the KCI system. Often this is referred more as ArjoHuntleigh kind of filling a gap with the KCI portfolio, but it goes both ways.
Thank you, Alex.
Very helpful, thank you. Very helpful, thank you.
Excellent. Any more questions?
The next question comes from Kristofer Liljeberg , from Carnegie. Please go ahead.
Yeah, hi, good morning. A few follow-ups. I guess you didn't want to comment specifically on the margin, but, given the EV-EBITDA multiple you're giving, it seems the EBITDA margin was around 19%. But given that this is mainly rental business, what's the depreciation like in this business?
I think we'll, well, Kristofer , I think we will be back. I see that we have sort of quite deliberately, as you may have noted, tried to avoid talking about that side of the business, because it is a sort of the nature of a carve-out business and how it's being allocated. Because I want, once it gets integrated into our group, I think it's essential that it's based on the right assumptions. But this is a business that has a higher than the sort of average depreciation because of the rental nature of the business. So you would need to take off a higher D from the EBITDA to come to the EBITDA compared to sort of Getinge's average. That's a fact.
But, I'd like to refrain a little bit from going down this avenue. In due course and in a not too distant future, we will be forthcoming with more detailed information around the margin numbers.
Okay.
I hope that's fine with you all.
Okay, that's fine. But in the guidance or what you're saying about EPS for 2013, does that include costs in it is?
Yeah, that's a sort of full, all things as they fall into the P&L, all the different aspects. But typically, we would exclude any restructuring charges from commentary and EPS, but in this case, they're sort of fully included in the EPS accretion. But sort of how much of an EPS accretion, we'd like to come back with. I think at this point in time, as I've said on many, many occasions now, that it is a very accretive deal. I think at this point in time, we're not in a position to divulge all the details to allow you to make that conclusion yourself. But it is a very sound transaction that is EPS accretive.
But I think we need to come back with more details as to how big that EPS accretion is in 2013 and also in coming years. And hopefully, that could air in towards the end of the year.
Yeah. Okay, that's fine. Given that sales and earnings have been declining in the past year, and you're giving a multiple based on 11, what could you say about sales and earnings versus last year so far in 2012?
It wouldn't be a full fiscal year. I think it wouldn't be sort of a comparison we could make unless we made lots of assumptions. I mean, we see a stabilization of the business, as I said earlier, on the top line. And in a rental business, the gross margin is high. If you lose top line, you're gonna lose earnings. So stabilizing the top line and now sort of coming in with our own business to find ways of working together more efficiently and address new customers, et cetera, is what will generate higher revenues going forward and an improved cost position for the overall business.
Okay. So, so rather stable then compared with last year?
Yes.
And then, finally, I couldn't see the slide. So were you given a distribution of the different products, i.e., how much is therapeutic sales and how much is the patient handling business?
Not specifically on the patient handling, but it is very, very small. We're talking a few million dollars, $1 million or $2 million, I think, not more than that. So it was more of a product company that KCI acquired two years ago, maybe. But I think it's interesting to see that since Getinge or Extended Care combined their patient handling business with Huntleigh's therapeutic services business in 2007, most of our competition have responded by trying to get access to the patient handling market, with Hill-Rom's acquisition of Liko in Sweden and with KCI's acquisition of this patient handling company.
So I'm pretty convinced that there are good synergies to reap from combining these two technologies, one dealing with the mobility of patients with impaired mobility, and the other one dealing with the medical conditions that are a result of poor mobility. I still believe that is a very strong customer proposition, and I think now we have a situation where we have a significantly better balance between those two product categories, in a way that KCI or TSS couldn't do, and that Hill-Rom is still quite far from having, in terms at least, the revenues.
Okay, so, so this is mainly, absolutely, a majority is therapeutic surfaces products then?
Ab solutely.
In that wide business.
Special.
Okay.
Directly, yeah.
Could you just repeat what you said about the sales for therapeutic surfaces in the new company? Did you say $450 million?
Yeah, approaching 450, I would say. This is sort of a back of an envelope type calculation.
Okay, very good. Thank you.
Thank you very much.
The next question comes from Peter Östling, from Redeye. Please go ahead.
Yes, thank you. Most of my questions have already been answered, asked and answered. I just have a follow-up. Could you, Johan, just briefly, make a split of between rental and sales in the U.S. and Europe on the overall market?
When you say the overall market, you mean the therapeutic surfaces market or?
Yes, yes.
You mean the SEK 1.5 billion or?
Yes, yes, the SEK 1.5 billion.
No, I don't think I could do that off the top of my—b ut it wouldn't be exact, but it would probably be near enough. But say, 65%-70% of that would most likely be rentals, and the remainder would be capital equipment sales or sales of support surfaces.
Yeah, and the rental part would be higher in the U.S. compared to Europe?
Yes, definitely.
Okay. Okay, thank you.
Thank you.
The next question comes from Ingeborg Øie from Jefferies. Please go ahead.
Good morning. Thank you very much for taking my questions. Three of them, and quick ones, hopefully. Firstly, what are the CapEx requirements that you expect from TSS going forward? Secondly, just wanted to confirm that the less than 3% loan, but also on the more permanent financing, coming at a later stage. And then finally, I wondered if you could comment on what share of Getinge's revenues will come from the rental model, including also the, the linen business, et cetera, after this transaction. Thank you.
Okay. I think the first one, question, I think I'll pass on that. I think it's a relevant question. It's a little bit the same question I got before around depreciation, but also somewhat different way, sort of what is the-- I think the CapEx that is not, if we say, related to the rental fleet, is probably quite a lot below group average, actually. I would guess that that component is no more than 2% of revenues of the business acquired.
The depreciations associated with the fleet is a number I think we'd like to get back to a little bit at a later stage, and it will obviously form an important element in communicating the EBITA margin eventually, which we will be doing, or to the effect that we think that there is anything to change in either Extended Care or the group's EBITA margin outlook, which I've already said that we don't intend to. But I'd like to get back to that one. I think when it comes to the debt off, I think I mean, this is a dollar dollar loan, and I think that accounts for it. It may be broken up later on into different components more sort of in line with the geography.
I don't know if you have any comments there, Ulf?
We will finance this through a dollar loan, and it will remain in dollar going forward. Because the purchase price is paid in dollar.
Yes. Then, sorry, your last question, Ingeborg, was the rental as a percentage of Getinge's overall revenue base or Extended Care's revenue base?
Overall revenue base, please.
Base. Then I would say that it would be, so if it's, say, 4... It probably would be, 10-ish, around 10%, I think. A little bit off the top of my head, but about 10%.
And that includes any other rental models you may have in other divisions than Extended Care as well?
Which we don't.
Which you don't.
This would actually be the business.
Okay, great.
Okay. Thank you, Ingeborg.
Thank you.
I think we can take one last question, if there is one, before we wrap up.
We'll take the last question, which is a follow-up question from Michael Jüngling from Morgan Stanley.
Thank you. I have two more questions. Firstly, on the TSS EBIT margin, have you, as part of the purchase agreement, have you agreed on what one should do with the non-allocated costs? Because if you look at the margins of TSS, they seem to be quoted before a whole bunch of costs, like general headquarters expenses, share-based compensation. So when we look at the margins as a guidance for modeling, should we be looking at the operating margin as disclosed in the filings, or do we have to allocate some of the non-allocated costs in the KCI annual report? And question number two is on the TSS carve-out.
I'm just wondering how, how complex that is and whether perhaps in 2013 we see some revenue dis-synergies, primarily because I, as I, as opposed, products can no longer be sold through, through the KCI Express website. You also have, shared resources with, Advantage, centers, 850 people. How does one think about trying to make sure that there's no revenue dis-synergies when a portion of the business, I suspect, has gone through other infrastructures, within KCI's other divisions? Thank you.
Hmm. Okay. Thank you, Michael. No, I think it's a valid comment because I presume that some of you will actually go back and sort of scrutinize filings to see sort of what the history has looked like in this business. There is clearly sort of a situation where we have costs that are directly attributable to this business, and then there are costs that have sort of been pooled or used centrally and then allocated out to the businesses, or in the case of the reporting, not allocated at all. I would say that the truth that will come out of this is gonna be neither of the two things you have. There will be portions of allocations that we will have.
There will be what we call dedicated employees that will come to us. There are then a number of employees that are in allocated pools... and the part of the transition from KCI into our own organization will be to establish those functions as part of our organization rather than TSS. So there are a number of different agreements we have that will survive for a certain period of time that will allow us to function effectively. But then, obviously, the aim is for us to assume all of those responsibilities and all of those functions as part of our own organization.
So I wouldn't, whereas they're not sort of off the charts number, they may not necessarily apply to the situation that we are in now with the business, and that the new owners may also have had different opinions around what were allocated cost centrally and what were attributable cost, actually, to all of those businesses. So, I mean, we have gone into an immense degree of details in this organization, and it is complex, but it is no more complex than other carve-out transactions we've done, like the Boston Scientific assets that we acquired, for example. So, it's a little bit... It's, I'm dodging a little bit the questions around EBIT and EBITDA margin, et cetera, because they are for the very reasons that you raised here, Michael.
It's something that is being created as part of our organization here, but that the numbers that we have communicated on historical multiples are accurate and relevant. But once we start and integrate this into our own organization, it will look different.
When you give us the valuation multiple of EBITDA, I presume that is all before non-allocated costs, and therefore could-
No, no, that's including allocations of cost to this business.
Okay. And maybe a comment about the risk of revenue dis-synergies if you haven't got access to certain KCI infrastructure that-
I mean, if I go back and look over the years where we've had a distinct strength, is particularly when we have taken on board assets that haven't been sort of the focus of the companies from which they have come, and we have a long history of that. I think that we will—We are very focused on being successful in this business. And I think gaining access to this new business, I feel very, very confident in saying, and that this business will get a focus that it hasn't had over the last few years. And I think that alone will bring a lot of positive effects on the business from a revenue standpoint.
Just by putting in this focus around the business, I think also for the people working in that business will be very beneficial for the future development.
Great. Thank you. Thank you very much.
Okay. Any more questions, or-
There are no further questions at this time.
Okay. Thank you so much. No, I, I, again, thank you for listening in. And as always, when we communicate the transaction, we are at an early stage. I, I hope you can understand that we want to have a good and constructive dialogue with the employees on the other side, before we sort of cast our our joint plans in in tablets of stone, and those will be forthcoming. But, as I said on numerous occasions here, this is a a very accretive deal, and it needs to be because of the sort of growth dynamics of the assets that we are acquiring. We are very, very clear, and I've said so many times, looking to improve the rates of organic growth.
So when we make acquisitions of businesses with, sort of less dynamic top lines, it has to be on the merits of, of the value that they can create in other parts. But at the same time, we, we feel that with the added focus that we will give to this business, through the joint revenue synergies, not only with our existing therapeutic services business, but also with our existing patient handling business, we feel very confident that we can improve the, the top-line growth of this business. But I, I don't think anyone should think that this is a business that, from an organic standpoint, will sort of, be accretive to the group's overall organic growth. But it's, it's, a business that we would like to see come up towards maybe the 5% organic growth.
That would be sort of our ambition with this venture, but not what we have based the transaction on. More information will be forthcoming. I hope you'll bear with us. I think the next point is most likely gonna be when we announce the close of this deal, when we actually pay for the assets, which we said will be the end of the year. I think at that point in time, we'll probably be in a position to be a little bit more explicit around the financial effects and the impact on margin and so forth. So, thank you very much for being with us, and as I said, we'll be back with more information in due course. Thank you.
Thank you. That will conclude this conference call. Thank you for participating.