Dec. 18 (Bloomberg) -- Biomet Inc., the maker of artificial hips and knees that put itself up for sale in April, agreed to be acquired for $10.9 billion by a private equity group including Blackstone Group and Goldman Sachs Capital Partners.

The $44-a-share cash offer is 27 percent higher than the Warsaw, Indiana-based company's price on April 3, before Biomet hired Morgan Stanley to help consider ``strategic alternatives.'' The buyout group, in which Kohlberg Kravis Roberts & Co. and Texas Pacific Group also participate, may plan to sell pieces of Biomet, said Bruce Nudell, an Sanford C. Bernstein & Co. analyst in New York.

``They have about 25 percent of the company that needs to be fixed,'' Nudell said in a phone interview today. ``They could clean up the spine business and sell that off to someone else at a relatively low multiple, and get premium prices by selling hips and knees to a strategic player like Smith & Nephew.''

Biomet also said it would delay its second-quarter earnings report because a review found irregularities and poor documentation for stock-option grants during the past decade. Correcting errors in accounting for the grants may have a ``material effect'' on past and current financial statements, Biomet said.

Shares of Biomet fell 41 cents, or less than a percent, to close at $41.59 in Nasdaq Stock Market composite trading. The stock has gained 13 percent in the past 12 months.

Shares Downgraded

Biomet's board unanimously approved the merger agreement and the transaction is set to close by Oct. 31, 2007. Analysts at A.G. Edwards & Sons Inc. downgraded the stock to ``sell,'' saying additional bids for the company weren't likely.

`We expect the stock to trade near the present value of the acquisition price,'' wrote Jan David Wald, an analyst at A.G. Edwards in Boston, in a note to clients. The downgrade is ``to reflect the always-present risk that the deal could break apart and the lack of further upside opportunity.''

Spokesmen for Blackstone and KKR, both based in New York, and Fort Worth, Texas-based TPG declined to comment and referred calls on the transaction to Biomet. Andrea Raphael, a spokeswoman for New York-based Goldman, wasn't available. Biomet's Greg W. Sasso and Barbara Goslee didn't return phone calls for comment.

The agreement calls for a $272.5 million fee, payable by Biomet or the private equity group, if either party terminates the contract, the company said in a regulatory filing.

Smith & Nephew

Shares of Smith & Nephew Plc, the London-based orthopedics products maker that was in talks to buy Biomet, rose 39.25 pence, or 8.1 percent, to 521.75 pence in London. Analysts at Merrill Lynch raised their rating to ``buy,'' saying the company may announce a cost-reduction program and become a takeover target itself.

This year, a record $683 billion of private equity and management takeovers have been announced, according to data compiled by Bloomberg. That includes the two biggest buyouts in history, the $36 billion purchase of Equity Office Properties Trust and the $33 billion HCA Inc. takeover.

Biomet has 10 to 11 percent of the U.S. hospital market, mainly with sales of higher-priced devices that have solid profit margins, Nudell said. The company is particularly strong in hip and knee reconstruction, with sales of both types of devices rising 9 percent in the second quarter.

Analysts said lowering Biomet's tax rate and selling off units with lagging sales would boost performance at the company, which missed estimates for six of the past seven quarters. It had 6,357 employees in May, based on data compiled by Bloomberg.

High-Tax States

Biomet makes most of its products in Indiana and New Jersey, resulting in the highest effective tax rate in the industry, said Michael Weinstein, an analyst at J.P. Morgan in New York, in a note to clients.

A sale of the dental implant business, which Biomet bought in 1999 for $175 million, may generate as much as $1.7 billion, Weinstein said. Companies such as Straumann Holding AG and Zimmer Holdings Inc. may be interested in the unit, with sales of about $240 million this year, he wrote.

Biomet said a special committee that has been probing allegations that stock options were backdated made a preliminary report to the board on Dec. 14. The panel found that a ``substantial number'' of options for nearly 20 million shares given mainly to employees from 1996 to 2006 were issued on dates other than when the grants were actually made, to coincide with a lower stock price, the company said.

Most recipients weren't officers or directors, and some senior managers of the company were aware of the practice, the committee reported. Biomet said it hasn't been able to determine whether the errors will lead to a finding that the company's current or past financial statements shouldn't be relied upon.

Option Back-Dating

Probes of option dating have affected almost 190 companies, and more than 60 executives have left their jobs as a result of the investigations. Backdating options to a point when a stock is near a low increases the potential profits for their holders and may misrepresent the options' costs for companies.

Biomet alerted the Securities and Exchange Commission of the preliminary findings. The review, which isn't complete, shouldn't affect the sale of the company, analysts said.

``In the other cases, it was the officers granting themselves the lower stock price,'' A.G. Edwards's Wald said. ``In this case, it was the officers granting the lower price to someone else. Regardless, I don't think it is a deal breaker.''

Biomet's net sales increased 5 percent to $520.3 million in the second quarter, based on preliminary, unaudited numbers, the company said. Devices for the extremities, reconstruction and hip surgery led the increase, while sales of spinal devices fell.

To contact the reporter on this story: Michelle Fay Cortez in Minneapolis at mcortez@bloomberg.net.

Last Updated: December 18, 2006 16:14 EST