KeyBanc Downgrades Steris, Sees 'Binomial Outcome' Pending Litigation

In a report published Thursday, KeyBanc Capital analyst Matthew Mishan downgraded the rating on STERIS Corp (NYSE: STE) from Overweight to Sector Weight. The analyst believes that the company is unlikely to be able to mitigate FTC concerns, and a preliminary injunction hearing is likely to be followed by a lengthy administrative trial.

"With upside potential in the stock tied to successful completion of the deal, it sets up a binomial outcome; given where we are now, the probability is skewed more to the downside, in our view," Mishan said.

According to the FTC, the pending merger would prevent future competition in the gamma contract sterilization market. The U.S. market is currently "split evenly between STE and Sterigenics," the KeyBanc Capital report stated, adding that the FTC believes X-ray would be a close substitute to gamma, and Synergy had the unique capacity and intention to enter the US market with this technology, becoming a viable third player."

The analyst expects STERIS to argue that although the technology has been available for 20 years, it has not proven to be economically viable, while the FTC is likely to counter-argue that recent advancements in the technology would make it more commercially feasible.

"We do not see a reasonable scenario in which STE can remediate FTC concerns, and believe it would have already done so. FTC believes Synergy had the unique capacity to enter this market as a third competitor and there are no other players that could replicate the competition eliminated by this merger," Mishan explained.

The most likely next step would be a preliminary injunction hearing in the next few months. While the court could potentially deny the injunction, the analyst believes that the FTC's record over the past few years is strong. If the injunction is granted, the case would then entail a lengthy administrative trial, scheduled to begin on October 28.