The last year has seen a number of merger agreements between very similar medtech companies apparently unbothered by antitrust rules and tax laws. Now the US Federal Trade Commission has shown its teeth.
US-based sterilisation specialist Steris was all set to perform the tax inversion trick with the £1.2bn ($1.8bn) purchase of the UK’s Synergy Health, a services provider in the same area. But the FTC has said no, and the case will now go to judicial review. With two major orthopaedics mergers – Wright Medical’s bid for Tornier as well as the long running Zimmer-Biomet deal – still not closed, investors may be asking themselves why it is the Steris deal that has attracted the FTC’s ire.
Steris and Synergy are of course determined to resist the FTC’s decision – which, incidentally, has not yet been officially announced, with the companies themselves saying they have not seen the FTC’s formal complaint. Shareholders do not seem convinced that they will prevail: Steris is down 4% and Synergy 18% since Wednesday, when rumours of the FTC’s intention began to circulate.
The two groups say they will extend the long-stop date for completion of the merger to December 31, 2015, thought this is subject to UK court approval. Steris plans to extend its bridge credit agreement to the same date. They had initially set the close date for Q1 2015.
The lack of official communication means the reasons for the FTC’s move are unclear. Canaccord Genuity analysts suggest that it may be due to Synergy’s Applied Sterilization Technologies unit, which offers contract sterilisation services partly via facilities in the US. They wrote in a note that revenues from these probably amount to less than $20m, but Synergy is perhaps the number three contract sterilisation company in the US, with Steris being one of the top two.
Strategically – aside from the tax inversion angle – the merger is surely more focused on the much larger hospital decontamination arena. Steris would not be alone in seeking consolidation as the best way to deal with the widespread pressure on prices in the hospital sector. If it is these services that have triggered the FTC’s concern, it seems likely that Synergy would be willing to sell them if that persuades the commission to allow the deal.
In a sense it is surprising that it is the competition angle that has scuppered the deal rather than the tax trickery. This was one of the first inversions announced after the US treasury brought in new rules designed to make the practice less attractive (Synergy buy shows Steris keeping faith with inversions, October 14, 2014).
What this means for still-open mergers, most noticeably the Wright Medical and Zimmer deals, is hard to say. The FTC was happy with the Medtronic-Covidien deal, which in creating the largest company in medtech gave Medtronic a huge competitive advantage and also permitted it a low-tax Irish base.
The $3.3bn Wright-Tornier deal is also an inversion (Wright targets Tornier despite tax and antitrust risks, October 28, 2014). Not so Zimmer and Biomet: far from being based on different continents, their headquarters are in the very same small town. Perhaps this will make it easier for them to close the deal.
But the merger was announced over a year ago, and Zimmer has extended the closing deadline to late July. FTC clearance is notably lacking – antitrust authorities in Europe and Japan have both caved – despite Zimmer saying in April that it expected the commission’s blessing by the end of that month.
The FTC disallowing one merger is unusual. Two in the same sector would be extraordinary. Still, Biomet shareholders might be very careful not to walk under ladders or break any mirrors until the deal closes.