Bowing to market pressures, orthopedics manufacturer Zimmer announced that it is acquiring rival firm Biomet for $13.35 billion.
The transaction, which has been approved by the boards of both public companies, will close in the first quarter of 2015. Zimmer is paying $10.35 billion in cash and the remaining $3 billion through stock, although a portion of the cash comes from a new $3 billion unsecured term loan and newly issued senior notes.
Once the deal closes, Zimmer’s CEO David Dvorak will become the CEO of the combined company.
“The transaction positions the combined company as a leader in the musculoskeletal industry with a broad portfolio of products, technologies and services, enabling us to help shape how solutions are developed and delivered. We believe that current demographic and macroeconomic trends affecting the healthcare industry will reward companies that successfully partner with other key stakeholders to improve patient care in a cost-effective manner,” said Dvorak, in a news release.
The deal also tells the story of current market realities.
“With implant pricing remaining under pressure and hospitals continuing to consolidate, medtech companies are looking to gain scale and reduce costs,” wrote Glenn Novarro, in a research note about the acquisition announcement that he described as a “surprising turn of events.”
One analyst, who also echoed surprise, described the deal as “transformative” thereby creating a “formidable player” in the orthopedics space.
“The transaction now catapults [Zimmer] more firmly into the #1 share position in the [worldwide] hips/knee market (#2 behind JNJ in overall ortho),” wrote Richard Newitter, an analyst with healthcare investment bank Leerink Partners.
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Zimmer is paying a hefty premium for Biomet, but Newitter believes that the synergy potential justifies the expenditure, as well as “Biomet's strong R&D pipeline and presence in faster-growing end-markets like sports med and extremities.”
In fact, Zimmer expects to have synergies of about $270 million by the third year following the completion of the deal, with about $135 million expected in the first year.
Biomet’s acquisition was announced as part of Zimmer’s first quarter earnings report which showed that the Warsaw, Indiana firm had fallen short of analyst’s expectations in terms of revenue althoughit did beat their earnings per share estimates.
Sales increased 2% to $1.16 billion in the quarter ended March 31, compared with $1.14 in the same period a year ago. Profits climbed to $221.5 million, or $1.29 per diluted share, compared with $218.6 million, or $1.28 per diluted share.
[Photo Credit: iStockphoto.com user Cimmerian]