3M to spin off $8.6 billion health care business

3M announced Tuesday it will spin off its $8.6 billion health care business as the global manufacturer seeks to focus its portfolio and boost profitability.

While not a complete breakup like those proposed by industrial peers General Electric and Toshiba, the move will profoundly reshape Maplewood-based 3M and its yet-to-be-named health care company spinoff.

“We have positioned health care to be successful as a stand-alone enterprise,” Chief Executive Mike Roman told investors Tuesday morning. “Both companies will sharpen their focus to continue investing and winning in global end markets and have greater flexibility to strategically deploy capital, drive innovation, and accelerate growth.”

The health care business amounted to one-quarter of 3M’s revenue in 2021. Products include bandages, regulated medical devices, oral care and health care IT.

Once complete, the 3M health care spinoff will be the third-largest medical technology company in the state after Medtronic and Boston Scientific.

The remaining company, which will maintain the 3M name, had $26.8 billion in sales last year across the safety and industrial, consumer, transportation and electronics segments. The company will have a 19.9% stake in the health care spin-off that it will sell off over time, company leaders said.

3M will retain PFAS and ear plug litigation liabilities, which are seen as a major drag on the company’s bottom line and stock.

The separation is expected to be complete by the end of 2023.

The move follows other industrial conglomerates, such as General Electric and Johnson & Johnson, that recently announced plans to separate unrelated businesses into different companies.

“Do lagging share prices mean that some companies look to exit/spin attractive businesses in order to crystallize value in an appealing asset?” posed a Barclays report that predicted a 3M health care spinoff earlier this year.

3M’s stock has been trading at its lowest levels in nearly a decade in recent weeks. Shares were up 6% is early trading Tuesday.

The planned spinoff also comes less than three years after 3M grew its health care business with its largest ever acquisition, the $6.7 billion purchase of medical device company Acelity.

For most of its 120-year history, 3M has focused on acquiring businesses — growing and evolving from an abrasives manufacturer to the major industrial supplier and consumer products maker it is today.

But in recent years, 3M has been divesting more than acquiring. In addition to a still pending sale of its food safety business, 3M has offloaded 15 different businesses in the past decade, according to Mergr.

One of the company’s largest spinoffs created Imation in 1996.

Analysts largely lauded the company’s planned breakup during a conference call Tuesday morning, but questions remain over how the new businesses will fare.

“This is a stable, low growth, profitable business,” Wolfe Research analyst Nigel Coe wrote about the health care business, and added the decision to spin it off “is some acknowledgement of the need for cash.”

3M saw sales and profitability slip across all of its divisions this spring compared to the year before. Revenue for the company’s second quarter, which ran April through June, totaled $8.7 billion.

The company’s profit was almost entirely wiped out by Combat Arms and PFAS litigation costs. 3M earned a $2.2 billion profit before those and other expenses; the unadjusted quarterly profit was $78 million.

On Tuesday, 3M announced plans to resolve the Combat Arms earplug litigation by sending its Aearo Technologies subsidiary through bankruptcy and setting $1 billion in a trust fund to pay claims.

There are about 230,000 outstanding cases brought by U.S. military service members and veterans who allege the earplugs were faulty and caused hearing damage. Aearo filed for Chapter 11 bankruptcy protection on Tuesday.

The company is also paying hundreds of millions of dollars to settle PFAS concerns in Belgium, though it faces ongoing litigation in the U.S.

“We plan to vigorously defend ourselves,” Roman said.

On Tuesday 3M reduced its 2022 financial outlook due to a strong U.S. dollar and the possibility of a recession.