Zimmer to Buy Biomet for $13.4 Billion Adding Orthopedics

Zimmer Holdings Inc., a maker of artificial hips and knees, agreed to acquire rival Biomet Inc. for $13.4 billion to become the second-largest company in the rebounding market for treating muscle and orthopedic injuries.

The purchase will end a planned initial public offering by closely held Biomet’s parent, Biomet Group Inc., Warsaw, Indiana-based Zimmer said today in a statement. It’s the latest in a spate of deals, led by Novartis AG and GlaxoSmithKline Plc, that show medical companies are adding depth and expertise as the focus on cost and innovation in health care intensifies.

The acquisition will help Zimmer take on Johnson & Johnson, the No. 1 manufacturer in the now-growing $45 billion market, and Stryker Corp., which it will leapfrog with the Biomet purchase. Sales and profit have started to accelerate after the recession led patients to delay elective surgeries and insurers to crimp prices. Biomet will increase Zimmer’s range of products and expand its geographic reach, said Jason McGorman, an analyst at Bloomberg Industries in Princeton, New Jersey.

“This will give Zimmer some leverage when they go to hospitals, and help them compete,” McGorman said in a telephone interview. Also, “they get a little more in terms of products in other areas, like sports medicine, extremities and trauma, where Zimmer has less exposure.”

Cost Savings

Zimmer and Biomet, which are located in the same town, expect to generate cost savings of $135 million in the first year and $270 million by the third year. The savings will contribute $1.15 a share to $1.25 a share in earnings during the first year, James Crines, Zimmer’s chief financial officer, said on a conference call.

Biomet’s initial public offering announced last month was intended to raise about $100 million to pay off the debt incurred by Biomet’s owners, including Blackstone Group LP, TPG Capital and Goldman Sachs Group Inc., when the company went private in 2007.

The savings and increased earnings from the first year after the acquisition were embraced by investors, who sent Zimmer’s shares up 12 percent to $101.97 at 4:04 p.m. New York time, the biggest increase since October 2008. The company’s shares have gained 37 percent in the past 12 months.

“The bottom line is it makes a lot of sense,” said Mike Matson, an analyst at Needham & Co. in New York. “There are a lot of cost savings to be had and the scale should provide an advantage as their customers, hospitals and insurance companies, go through waves of consolidation.”

Investors have wanted Zimmer to make a significant acquisition for some time, he said in a telephone interview, making the market’s reaction a logical response.

Pent-Up Frustration

“There was frustration that they hadn’t done anything, combined with a deal that seems to make a lot of sense and is accretive,” he said. “It’s partly because interest rates are so low. You are looking at the cash either sitting on your balance sheet and earning next to nothing, or you are borrowing at next to nothing.”

Zimmer will pay $10.4 billion in cash and issue $3 billion in shares to Biomet investors, according to the statement. The purchase includes debt.

The acquisition would be Zimmer’s largest since it was spun off from Bristol-Myers Squibb Co. in 2001, according to data compiled by Bloomberg. It’s the fifth-largest medical device deal in past decade, and the biggest since J&J’s Synthes purchase for $19.7 billion in 2012.

Drugmaker Deals

Zimmer’s announcement follows a flurry of deals this week among drugmakers. Novartis agreed to buy GlaxoSmithKline’s oncology business for as much as $16 billion, to sell Glaxo its vaccines line for as much as $7.1 billion and to sell its animal health business to Eli Lilly & Co. for $5.4 billion. Valeant Pharmaceuticals International Inc., meanwhile, announced a bid to buy Allergan Inc. for $45.7 billion.

The acquisition will broaden Zimmer’s product offerings and accelerate an innovation program to address changing medical needs, Chief Executive Officer David Dvorak said in a telephone interview. While there are similarities between the two portfolios, Dvorak said he is confident the deal will clear regulatory hurdles and close by the first quarter of 2015. It will take three years to fully integrate the two firms, he said.

Three of the companies’ combined product groups will produce sales above the $1 billion mark after the deal closes, led by knee and hip implants. Biomet will bring strength in the faster-growing areas of sports medicine, extremities and trauma, making the category Zimmer’s third largest, Dvorak said.

Sports Medicine

Sports medicine involves tools used to treat injuries such as torn ligaments, while trauma products include plates, screws and nails used to care for patients after accidents. The extremities business covers products for the hands and wrists, plus entire systems to help repair a damaged shoulder or elbow.

“Biomet is a perfect fit for us,” Dvorak said. “For our stockholders we expect this transaction to create significant value and provide attractive growth and profitability over the long term.” The acquisition came together quickly with a “concentrated effort” during the last several weeks, he said.

The deal raises the possibility that consolidation in the orthopedic market may pick up, with J&J or Stryker potentially bidding for Smith & Nephew Plc., said Lisa Clive, an analyst with Sanford C. Bernstein & Co. in London. Other targets include Conmed Corp., Cardiovascular Systems Inc., Spectranetics Corp. and Wright Medical Group as medical technology firms embrace a bigger is better mindset, Matson said.

Smith & Nephew

“Our initial thought following the Zimmer/Biomet news is that a purchase of Smith & Nephew is still unlikely in the 18-24 month time frame,” Clive wrote in a note to clients today. “However, this does open up the possibility of consolidation in the longer-term, which at the very least places a pricing floor on Smith & Nephew shares.”

Smith & Nephew climbed 3.4 percent to 909 pence in London. It had risen 19 percent in the past 12 months through yesterday.

Credit Suisse Securities LLC is acting as financial adviser for Zimmer and White & Case LLP acted as legal adviser, according to today’s statement. Bank of America Merrill Lynch was lead financial and strategic adviser for Biomet, with Goldman Sachs Group Inc. as co-adviser, to Biomet. Cleary Gottlieb Steen & Hamilton LLP is Biomet’s legal adviser and regulatory legal adviser in Europe, and Weil, Gotshal & Manges LLP acts as regulatory legal adviser in the U.S.

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