Elbit sells off Elscint businesses through deals with Picker and GE

Deal could affect OEM agreements

The medical imaging industry witnessed the dismemberment of Israeli multimodality vendor Elscint this month when its parent company, Elbit Medical Imaging, announced Sept. 11 that it has agreed to sell the firm in pieces to GE and Picker. GE has agreed to buy Elscint’s nuclear medicine and MRI businesses for $100 million, while Picker will acquire Elscint’s CT division for $275 million. The news coincided with the departure of Elscint CEO Jonathan Adereth, who may not have agreed with the divestiture decision.

Rumors regarding Elscint’s future first surfaced in Israeli newspapers and were given a wider audience with the company’s Sept. 1 announcement of Adereth’s departure. The company said that Elscint chairman Emmanuel Gill would be taking over Adereth’s position as CEO "in light of strategic discussions regarding Elscint’s future."

The other shoe dropped with the release of a Reuters wire service story on Sept. 2. The article quoted Elbit CFO Oded Tamir as stating that Elbit was considering a restructuring of Elscint that could include the sale of all or part of the company.

Tamir stated that Elscint must improve the return on investment it has turned in over the last several years. The company has been able to grow its revenues, but profits haven’t kept pace: Elscint in 1997 posted net income of $709,000 on revenues of $303 million, while the previous year, it recorded a profit of $8.1 million on sales of $311.4 million.

Elscint implemented a restructuring effort late last year to improve its performance (SCAN 11/12/97).

Elscint’s profit situation appeared to be improving this year, a development that the company attributed to the restructuring. For the first six months of 1998, Elscint’s sales were $163.2 million, up 11%, while net income stood at $3.3 million, compared with $1.4 million in the first six months of 1997. But the subsidiary’s progress wasn’t good enough for Elbit, however.

Elscint has been hamstrung over the years by a public perception of the company as a second-tier imaging vendor. The company has often developed industry-leading technology, such as its CT-Twin scanner, which presaged by years the multislice CT announcements that came this month from its competitors in the modality. But Elscint’s lack of a strong home market in which to sell its products has forced the vendor to rely on distributors and overseas subsidiaries that sometimes lack the clout of home-grown competitors.

Adereth sought to nullify this disadvantage by signing technology development deals with Elscint’s competitors, such as a relationship to supply CT components to Siemens and the ELGEMS nuclear medicine joint venture with GE. In spite of Adereth’s departure, the strategy has worked well, especially with ELGEMS, according to James Ricchiuti, an analyst with Lehman Brothers in New York City.

"I wouldn’t say his leaving is an indication that the strategy to work with others has not been succeeding; It really is succeeding," Ricchiuti said. "The joint venture with GE has been very successful so far."

That success may have led GE to increase its investment by acquiring the nuclear medicine and MRI businesses. The deal calls for GE to acquire Elscint’s sales and service capabilities for both the nuclear medicine and MR imaging businesses, and certain design and manufacturing capabilities of the MR business. GE and Elscint plan to continue their joint venture, ELGEMS, formed in 1997 to design and manufacture nuclear imaging products. With the agreement, GE acquires Elscint facilities in the U.S., Israel, and England. The transaction is expected to close in November.

The GE deal left CT as Elscint’s only remaining major division. Elbit disposed of the business hours later, announcing the $275 million sale to Picker. The agreement will dramatically boost the Cleveland company’s CTmarket share. Unknown is how the acquisition will affect Elscint’s CT technology relationship with Siemens.

The deals may have created dissension on Elscint’s board, however. On Sept. 11, Elscint reported that Adereth and Dan Inbar have resigned from the company’s board. Inbar was a former Elscint executive who has served on the board since leaving the firm several years ago. Adereth’s departure in particular was puzzling, as Elscint had said that he would remain on the board after he relinquished his duties as CEO.