3M’s Largest Deal Ever for Advanced Wound Care Provider Doesn’t Bandage Its Latest Cut

On May 2nd, wide-moat rated 3M announced by far its largest deal ever for advanced wound care provider Acelity.After reviewing the deal, the initial impact of 3Mâs re-segmentation, and incorporating first-quarter results and managementâs significantly lowered full-year 2019 guidance, we lower our fair value estimate to $190 per share from $197.The primary driver of the lower valuation is managementâs outlook on organic growth throughout the rest of 2019, which markedly fell below our near-term expectations.Nevertheless, from an intrinsic valuation perspective, we remind investors that we saw the previously 2-star stock as overvalued when it rallied to $219 prior to first-quarter earnings.We believe our long-term thesis on the stock remains intact, and we continue to retain our wide-moat, stable trend, exemplary stewardship, and low uncertainty ratings.At a stock price of $185, we think that stock now trades within reason in terms of its price to fair value ratio.The deal seems on the expensive side to us at 15 times unadjusted EBITDA. (e-bit-dah)We model the deal as only slightly value dilutive, akin to the market reaction which saw the stock drop about 1%.We believe the dealâs rationale highly depends on managementâs ability to extract ambitious cost synergies from its target, at 8% of revenue over the course of three years.We have several concerns with this daunting task.First, management has acknowledged it was slow to react to market headwinds that prompted its lowered guidance. Short-cycle businesses are inherently hard to predict, but we had some early clues of the slowdown trickling through China as well as automotive and electronics from the rest of our coverage.Second, management is undergoing a restructuring program that was only recently announced and is also juggling several lawsuits related to PFAS and asbestos litigation related to its respirators.