Johnson & Johnson agreed to buy Synthes Inc for $21.3 billion, adding devices to treat bone fractures and trauma in the biggest purchase in the company’s 125-year history.
Synthes holders will receive 159 Swiss francs a share in cash and stock, the companies said in a statement today. That’s 8.5 per cent above the closing price yesterday and 15 per cent higher than April 15, the last trading day before Synthes said it was in talks. Synthes is based in West Chester, Pennsylvania, and the company’s stock trades in Switzerland.
The purchase will give J&J a device company with almost half the trauma market and an operating margin of 35 per cent, the highest among medical-products makers with stock values of more than $5 billion. New Brunswick, New Jersey-based J&J, the world’s second-biggest seller of health products, has had more than 50 drug and device recalls since the start of 2010.
“In trauma, Synthes has 50 per cent market share as well as scale and margins,” Navid Malik, an analyst with Matrix Corporate Capital LLP, said in an interview today. “It certainly complements J&J’s orthopedics business.”
Synthes Chairman Hansjoerg Wyss, the company’s founder, and related entities have agreed to vote at least 33 per cent of the company’s stock in favour of the deal, the companies said. The sale may make Wyss the richest person in Switzerland, surpassing biotechnology billionaire Ernesto Bertarelli.
Synthes’s Value
Synthes holders will receive 55.65 francs a share in cash, and 103.35 francs a share in J&J stock, according to the statement. The stock portion of the payment can fluctuate with Synthes holders receiving as few as 1.7098 J&J shares and as many as 1.9672 depending on the US company’s share price in the days before the acquisition closes.
The purchase values Synthes at about 11.2 times this year’s forecast earnings before interest, tax, depreciation and amortisation, according to Bloomberg data. Acquirers of medical products companies paid a median of 11.5 times profit in the past five years, the data shows.
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J&J probably will have to divest some businesses to win antitrust approval, which limits the price it’s willing to pay for Synthes, Lisa Bedell Clive, an analyst with Sanford C Bernstein & Co in London, said in a telephone interview today.
“It’s a fair price,” she said. “I didn’t expect much more than that given the potential for divestments, particularly on the spine side.” The firm has a “market perform” rating on Synthes stock.
Synthes rose 70 centimes, or 0.5 per cent, to 147.2 francs at 12.15 pm in Zurich trading. Before today, the stock had returned 17 per cent, including reinvested dividends, in the past year, compared with a 9.3 per cent loss for the Bloomberg World Health-Care Products Index.
The stock may be trading so far below the offering price because some investors are concerned the purchase may not go through, according to Malik. Some J&J shareholders may not want the company to tackle the largest acquisition in its history until its problems have been fixed, he said.
The deal will close in the first half of 2012, the companies predicted. The purchase is subject to antitrust review in the US and the European Union, and requires the approval of Synthes shareholders, according to the statement.
J&J plans to combine Synthes, the biggest maker of devices to treat bone fractures and trauma, with its DePuy unit. Together, they will become the largest part of J&J’s medical devices and diagnostics segment, the companies said. Pfizer Inc is the world’s biggest seller of health-care products.
Emergency Surgeries
“Orthopedics is a large and growing $37 billion global market and represents an important growth driver for Johnson & Johnson,” Bill Weldon, the chief executive officer of J&J, said in the statement. The companies plan a conference call with analysts at 8.30 am New York time.
Trauma isn’t an elective business — most of Synthes’s products are used in emergency surgeries — so it isn’t as sensitive to economic swings or government pricing pressure as the general orthopedics market, Malik said.
Wyss, 75, wanted to sell so he could focus on philanthropy and other causes he’s interested in, said a person with knowledge of the sale who declined to be identified because the matter was confidential. The founder wanted a buyer with the means to further expand Synthes, the person said. Potential suitors were contacted last year, the person said.
Credit Suisse, Goldman
The acquisition won’t affect J&J’s profit forecast for this year, and will “modestly” reduce adjusted earnings per share in 2012, the company said. Synthes has $2 billion of cash on hand. Excluding that, the purchase will cost about $19.3 billion, the companies said.
J&J rose 84 cents, or 1.3 per cent, to close at $64.95 yesterday on the New York Stock Exchange, giving the company a market value of $177.7 billion. The stock has returned 4.8 per cent in the past year.
Credit Suisse Group AG and New York-based law firm Shearman & Sterling LLP advised Synthes on the sale, while Goldman Sachs Group Inc and New York-based law firm Cravath, Swaine & Moore LLP worked with J&J.
J&J looked at buying Smith & Nephew, Europe’s biggest maker of artificial hips and knees, a person familiar with the plan who declined to be identified because the discussions were private said in January. Smith & Nephew fell 15.07 pence, or 2.3 per cent, to 649 pence in London trading.