Trauson Jumps by Record After $764 Million Stryker Offer
Trauson jumped HK$2.09 to HK$7.25, the most since it started trading in June 2010. Trading volume was 99 times the daily average over the three-month period before today.
Orthopedic implant sales in China will almost double to $2.7 billion by 2015, vaulting the country past Japan as the biggest market after the U.S., according to Frost & Sullivan, a market research company. Profit before taxes at Trauson, the nation’s largest maker of pelvic reconstruction plates and other products used in trauma surgery, more than tripled to 182 million yuan ($29 million) in the four years through 2011.
“In a highly fragmented Chinese market, Trauson is the largest distributor of trauma products and the No. 3 distributor in spine,” Michael Weinstein, an analyst at JPMorgan Chase & Co. in New York, wrote in a note to clients yesterday. “Trauson is highly profitable with gross margins in the high 60 percent range.”
Kalamazoo, Michigan-based Stryker is offering HK$7.50 per ordinary Trauson share in cash, 45 percent more than stock’s price on Jan. 8, when Trauson halted its stock pending an announcement. Stryker is paying 33 times Changzhou, China-based Trauson’s 2011 net income, about half the median of six comparable deals globally in the past six years, according to data compiled by Bloomberg.
The proposed acquisition compares with Medtronic Inc. (MDT)’s $816 million purchase of China Kanghui Holdings Inc. last September, which was at a 22 percent premium to Kanghui’s share price before the offer was announced.
“The higher premium should be justified as Trauson is China’s largest orthopedic player, while Kanghui comes in second,” Jason Siu, a Hong Kong-based analyst at OSK Investment Bank Bhd., said in a telephone interview.
“Stryker can take advantage of Trauson’s lower production cost in China, and network of more than 663 distributors covering 3,840 hospitals in China,” Siu said. He estimates that Trauson leads China’s orthopedic market with a 5 percent share of sales in 2011, followed by Kanghui with 4 percent, and a unit of Shandong Weigao Group Medical Polymer Co. (1066) with 3 percent.
Trauson made 67 cents profit on every dollar of revenue in the six months through June and gross margins averaged 71 percent since the first half of 2009, according to data compiled by Bloomberg.
“The acquisition of Trauson is a critical step toward broadening our presence in China and developing a value segment platform for the emerging markets through a well-established brand,” Stryker Chief Executive Officer Kevin A. Lobo said in a statement.
The two medical device makers have had a relationship under a manufacturing agreement for instrumentation sets since 2007, Stryker said.
Stryker rose 2 percent to $60.62 at the close yesterday in New York. The shares have gained 17 percent in the past year.
Trauson doubled in value last year after tumbling 52 percent in 2011.
Luna Group has agreed to tender 61.7 percent of Trauson’s shares, Stryker said. The deal is expected to be neutral to Stryker’s 2013 diluted earnings per share, excluding one-time acquisition-related charges, and to add to earnings after that, Stryker said. The transaction is slated to close by the end of the second quarter.
Barclays Plc’s investment bank served as Stryker’s financial adviser and Sullivan & Cromwell provided legal advice.