Danaher's decision to spin off its water business is a win-win for long-term investors

Published Thu, Sep 15 20223:44 PM EDT

Danaher 's (DHR) announcement this week that it will spin off its growing water business is a big win for shareholders — including us at the Club. The medical diagnostics and health technology company has a great track record for creating shareholder value through both organic investments and strategic mergers and divestitures. This is another smart move. Danaher (DHR) will separate its Environmental & Applied Solutions, or EAS, business segment as a separately traded public company. EAS provides instruments and software to businesses and utilities to test water quality. The spin-off allows the two businesses to increase focus on their respective end markets. It also frees up capital at Danaher for additional growth investments (organic or via M & A) while allowing both companies to trade on pure-play multiples. Danaher can focus more on science and technology, while the newly formed company can better tap into the fast-growing need for clean water. Fifty-five percent of EAS revenue is recurring. The separation is expected to be tax-free to current shareholders and finalize in the fourth quarter of 2023. Since the announcement Wednesday, shares of Danaher were up 2% in a down market. "I do think this [DHR] should be up more on this news," said Jeff Marks, director of portfolio analysis at the Investing Club, during the "Monthly Meeting." "This is just textbook Danaher. The company has a rich history of spinning high-quality assets that are more cyclical compared to their core life science, biopharma business." Danaher in 2016 spun out industrial conglomerate Fortive (FTV), which at the time consisted of Danaher's Test & Management segment. In 2019, it spun out Envista (NVST), which had consisted of Danaher's dental segment. In both cases, after an initial growth hit due to the divestitures, we saw a notable sales growth acceleration once these slower growth business were on their own. For example, sales growth averaged about 4.1% from 2013 to 2015, dipped in 2016 due to the separation and then accelerated to about 8.5% in 2017 and 2018 before the Envista spin-off. Then following that spin-related decline in 2019, sales again accelerated to 24.4% in 2020 and 32.2% in 2021; some of that was likely also due to the benefit off pandemic related testing revenue. "I think there's going to be a lot of appeal for this new business," added Marks. "It i