(Adds private equity profit, comment, updates shares)
April 24 Zimmer Holdings Inc said on Thursday it would buy rival orthopedic products maker Biomet Inc for more than $13 billion, the latest deal in a wave of consolidations in the healthcare industry.
Investors gave a resounding thumbs up to the announcement, sending Zimmer shares up more than 18 percent on expectations the larger scale will help it navigate stiffer pricing pressure on medical devices from hospitals and insurers. The deal is expected to take Zimmer from the fourth-largest seller of orthopedics products to No. 2, behind Johnson & Johnson.
Zimmer, which expects to close the deal in the first quarter of 2015, said the combination would double the size of its spine and dental business, broaden its portfolio of products to treat bones, knees and hips, and give it an entry into the smaller but growing field of sports medicine.
"Biomet is a perfect fit for us," Zimmer Chief Executive David Dvorak told analysts and investors on a conference call.
The deal will also significantly add to Zimmer's earnings in the first year and lead to net annual cost savings of about $270 million by the third year after closing, the company said.
"The financial aspects of it are hard to find fault in," said Jefferies & Co analysts Raj Denhoy. "In healthcare, being a larger company that has a broader product offering seems to be the way that things are evolving. You're selling to hospitals as opposed to individual surgeons and having that larger footprint is believed over time to be important."
The Zimmer announcement follows a flurry of large deals and rumored transactions in healthcare aimed at either gaining scale or specializing in certain disease areas over the past few days.
In a surprise move earlier this week, Valeant Pharmaceuticals International Inc teamed with Bill Ackman's Pershing Capital hedge fund on an unsolicited $47 billion bid for Botox-maker Allergan Inc. That followed media reports that Pfizer Inc had approached British drugmaker AstraZeneca over a potential $100 billion merger that did not materialize.
Also this week, Novartis AG and GlaxoSmithKline Plc agreed to trade some $20 billion in assets, while Eli Lilly and Co agreed to buy Novartis's animal health business for $5.4 billion.
LONG TIME COMING
Piper Jaffray analyst Matt Miksic said consolidation in the $45 billion global orthopedics market was a long time coming.
"In hips and knees there are five pretty large players all competing for the business of the hospital and the surgeon and most people looking at the industry ... would say the economics work better for everyone if there were fewer," Miksic said.
Biomet was taken private for $11.4 billion by a private equity consortium in 2007, when the economy and medical device market were particularly strong.
The consortium, including affiliates of Blackstone Group , Goldman Sachs Capital Partners, Kohlberg Kravis Roberts & Co and TPG, last month had filed with U.S. regulators to raise $100 million through an initial public offering. That plan was overtaken by the Zimmer deal that has been approved by both boards of directors.
Morningstar analyst Debbie Wang said the deal was even more important for Biomet, which like Zimmer is headquartered in Warsaw, Indiana, as hospitals look to shore up profit by consolidating vendors.
"There's a lot of orthopedic makers out there right now and the smaller ones were at great risk of being left behind," Wang said. "So for Biomet to hook up with one of the larger players, it really saved their business over the long haul."
In 2013, the companies' combined revenue amounted to $7.8 billion.
Based on the $5.2 billion in equity that the four buyout firms invested in Biomet's leveraged buyout, and assuming no dividends paid to them since the acquisition, they stand to make more than 1.4 times their money on the deal, regulatory filings show.
"The implied transaction value would suggest around a 40 to 45 percent improvement in Biomet's valuation relative to where we held it as of March 31," Scott Nuttall, KKR's head of global capital and asset management, said on KKR's first-quarter earnings call on Thursday.
Under terms of the deal Zimmer will pay $10.35 billion in cash and issue $3 billion in shares to Biomet shareholders. . Once completed, Zimmer stockholders are expected to own about 84 percent of the combined company and Biomet shareholders about 16 percent, Zimmer said.
The cash portion of the deal will be funded by cash on hand and $3 billion from a senior unsecured term loan and an issue of senior notes.
Zimmer shares were up $10.54, or 11.5 percent, at $101.99 on the New York Stock Exchange after earlier climbing as high as $108.33.
Zimmer was advised by Credit Suisse Securities and White & Case LLP. Biomet was advised by BofA Merrill Lynch, Goldman Sachs, Cleary Gottlieb Steen & Hamilton LLP and Weil, Gotshal & Manges LLP. (Reporting by Bill Berkrot in New York and Esha Dey in Bangalore; Editing by Michele Gershberg, Phil Berlowitz and Cynthia Osterman)