Synthes Looked For Deal Amid View Of Tough Orthopedics Market (Wall Street Journal)
- Synthes board saw more challenging orthopedic-device market as the board evaluated sale offers
- Synthes considered offers from private equity
- J&J eventually offered to acquire Synthes for $21.3B
Synthes Inc.’s board saw challenges that would weigh on growth in the orthopedics-device market as the company engaged in a sale process that eventually led to a $21.3 billion deal with J&J.
Synthes prepared long-term internal projections–excluding any unanticipated future events, like an acquisition–that suggested sales and earnings growth will slow from recent levels, according to a 305-page regulatory filing J&J made with the SEC late Thursday.
The filing cautions against comparing the long-term financial outlook to Wall Street estimates, but it nonetheless offers insight into the process leading to the Synthes purchase announced in April.
It shows Synthes adviser Credit Suisse spoke with several potential strategic buyers and private equity firms, but J&J was ultimately competing against a no-binding offer from a group of three private-equity firms that offered a lower price for Synthes shareholders.
Synthes’s board of directors–including Chairman Hansjoerg Wyss, who together with his family owns 48% of the company–started the process of exploring strategic options back in April 2010.
The filing cited “a backdrop of significant changes to the regulatory, reimbursement, pricing and tax environments driven by healthcare reform and the weak economic environment.” It also said these things “reduced the growth prospects of Synthes and its industry,” leading the board to raise the possibility of exploring deals.
Synthes’s longer-term projections indicate it anticipated 8.3% sales growth this year and then steady 7% yearly growth through 2015, slightly off its 2010 pace, although its results were helped last year by favorable currency rates. The company projected similar rates of earnings growth over the long term.
The company’s projections were lower than the current consensus estimates through 2013 from Thomson Reuters. J&J has projected that the trauma market–where Synthes is the dominant player–will grow at about a 7% clip.
Synthes’s sale process included approaching nine potential strategic partners and six private-equity firms, none of which were named. As the process moved along, talks advanced with J&J and three private equity firms that presented nonbinding proposals. Those three firms ended up banding together.
While the value for Synthes shareholders in the cash-and-stock J&J deal can vary based on J&J’s stock price and the exchange rate between the U.S. dollar and Swiss franc, Synthes ultimately determined a strategic tie-up was better than the private-equity deal.
The Synthes board considered that shareholders would retain, through J&J stock, a stake in the combined company “and the related opportunity to share in its future growth,” according to the regulatory filing. Synthes also stands to receive a $650 million termination fee from J&J if the deal fails to close because of antitrust issues.
The board determined “potential risks were more than offset by the potential benefits of the merger,” the filing said.
The deal is expected to close in the first half next year, pending regulatory approval, making J&J the biggest player in the orthopedic-device market. J&J’s DePuy business is already among the largest orthopedics firms through its business for replacement hips and knees.
-By Jon Kamp, Dow Jones Newswires; 617-654-6728; jon.kamp@dowjones.com