Medtronic Inc. agreed to pay $816 million for orthopedic implant maker China Kanghui Holdings Inc., gaining a broader foothold in the nation’s medical-device market with its biggest overseas acquisition.
The pacemaker and spinal implant supplier will pay $30.75 per American depositary receipt in a transaction worth $755 million net of Kanghui’s cash, the Minneapolis-based company said in a statement on its website. That’s 22 percent higher than yesterday’s closing price.
The biggest purchase of a Chinese health-care products maker brings Medtronic closer to the goal of getting 20 percent of sales from emerging markets by 2016, from less than 10 percent last year. China is Asia’s second-largest user of medical devices, an industry that will grow 39 percent to $228 billion by 2015 in the world’s 10 biggest markets, MarketsandMarkets estimated last year.
“Kanghui provides several advantages for Medtronic,” Jason Mann, health-care analyst at Barclays Plc in Hong Kong said today in a report to clients. “Access to thousands of hospitals in China, the fastest growing orthopedic market, international corporate culture and emerging market access, with 15 percent revenue from outside China, including Latin America and the Middle East.”
Medtronic has spent more than $2.6 billion on overseas acquisitions, including a $221 million deal for a 15 percent stake in Shandong Weigao Group Medical Polymer Co. in 2007, at the time the biggest maker of medical devices in the world’s most populous nation.
“Kanghui brings Medtronic a broad product portfolio, a strong local R&D and manufacturing operation,” Chris O’Connell, president of Medtronic’s Restorative Therapies Group, said in the statement. The deal provides “advantages in the fast-growing Chinese orthopedic segment, as well as a foothold in the emerging global value segment in orthopedics.”
Based on the $755 million deal value net of Kanghui’s cash, Medtronic is paying about 32 times 2011 earnings before interest, depreciation, taxes and amortization. That compares with the 14 times earnings average of nine similar medical products deals announced or completed over the past 12 months, according to data compiled by Bloomberg.
The price may create some “sticker-shock” for Medtronic investors, said Michael Matson, an analyst with Mizuho Securities in New York. It may be justified by Kanghui’s rapid sales growth, profit margins and potential for expansion in China and other developing markets, he said.
“I would have preferred to see them pay less, but this is a fast-growing company in a fast-growing market,” Matson said in a telephone interview. “Those things are never cheap.”
Medtronic declined less than 1 percent to $43.12 at the close in New York. It has climbed 13 percent this year. Kanghui’s American depositary receipts surged 21 percent to $30.35. Each receipt equals six ordinary shares.
The deal is expected to close in the next few months and will help Medtronic widen its offerings in orthopedics and neurosurgery, according to the statement. Changzhou, China-based Kanghui was founded in 1997 and raised $68.4 million in an August 2010 initial public offering.
The acquisition fits with Chief Executive Officer Omar Ishrak’s plans to expand Medtronic in fast-growing emerging markets, particularly China and India.
“He’s been very clear that globalization is one of the things he’s doing,” Matson said. “They are probably going to do more deals where they can find opportunities to pick up good companies and get a jump start in these markets.”
Kanghui profit rose 21 percent to 121 million yuan ($19 million) last year, on sales that increased 35 percent to 327 million, according to data compiled by Bloomberg.