Johnson & Johnson (JNJ) agreed to buy Synthes Inc. (SYST) for $21.3 billion in the biggest purchase of the company’s 125-year history, to become the leader in the $5.5 billion market for devices that treat trauma victims.
Synthes holders will receive 159 Swiss francs a share in cash and stock, the companies said in a statement today. That’s 8.5 percent above the closing price yesterday and 15 percent higher than April 15, the last trading day before West Chester, Pennsylvania-based Synthes said it was in talks. The shares of Synthes trade in Switzerland.
J&J will gain a majority in the trauma market with the acquisition, Chief Executive Officer Bill Weldon said on a conference call. The purchase also gives J&J a device company with an operating margin of 35 percent, 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.
“Very infrequently do you ever see an opportunity for a company like Synthes to come into play with J&J,” Weldon said on the call. “We just thought this was an extraordinary opportunity and the time was right.”
Synthes already has 50 percent of the market for sales of screws, plates, bone grafts and other products to treat skeletal injuries, “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.”
The acquisition will lead to increased competition and will benefit doctors, customers and patients, Alex Gorsky, vice chairman of J&J’s executive committee, said on the conference call. “We believe we will not be any required to make any divestitures and if there are any, they will not materially impact the transaction.”
Synthes Chairman Hansjoerg Wyss, the company’s founder, and related entities agreed to vote at least 33 percent of the company’s stock in favor of the deal, the companies said. The sale may make Wyss the richest person in Switzerland, surpassing biotechnology billionaire Ernesto Bertarelli.
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 investors receiving as few as 1.7098 J&J shares and as many as 1.9672 depending on the U.S. company’s stock price in the days before the acquisition closes.
“We came to a mix that met the interests of both companies,” Dominic Caruso, J&J’s chief financial officer, said on a conference call.
The purchase values Synthes at about 11.2 times this year’s forecast earnings before interest, tax, depreciation and amortization, according to Bloomberg data. Acquirers of medical- products companies paid a median of 11.5 times profit in the past five years, the data show.
J&J probably will have to shed 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 10 centimes, or less than 1 percent, to 146.6 Swiss francs at the close of trading in Zurich, giving the company a market value of 17.4 billion francs ($19.75 billion). Before today, the stock had returned 17 percent, including reinvested dividends, in the past year, compared with a 9.3 percent loss for the Bloomberg World Health-Care Products Index.
The stock may be trading below J&J’s 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 acquisition until its problems have been fixed, he said.
Weldon said adding Synthes will not hurt the company’s focus on fixing the quality-control issues that led to products being withdrawn from the market.
“I don’t think that there’ll be any conflict here with the ability to bring these two companies together and stay focused on the commitments we’ve made,” he said on the conference call. “We’re going to be able to do both of these things.”
J&J rose 62 cents, or 1 percent, to $65.57 at 4:15 p.m. in New York Stock Exchange composite trading. The stock has climbed 8.3 percent since April 15, when the Wall Street Journal first reported the two companies were discussing a deal.
Moody’s Investors Service, the New York-based credit-rating company, said it was maintaining its AAA rating on J&J’s bonds while downgrading its outlook on the drugmaker to negative because of the deal’s “substantial use of equity.”
“Despite the benefits of acquiring Synthes, J&J is incurring new debt during a period of increased operating challenges including product recalls,” said Michael Levesque, Moody’s senior vice president, in a statement today.
The deal is expected to close in the first half of 2012, the companies said. The purchase is subject to antitrust review in the U.S. 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.
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.
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.
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 5.57 pence, or less than 1 percent, to 658.5 pence in London trading.
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