Macau might be China’s answer to Las Vegas, but gambling also takes place just across the water in Hong Kong. In forking over $764m in cash for the Hong Kong trauma specialist Trauson, orthopaedics giant Stryker is betting that the Chinese spinal device sector is the place to be.
Trauson has long been considered a good prospect for a takeover. It is China’s leading trauma device manufacturer, and with the country’s population ageing rapidly, and sales of orthopaedic implants in China forecast to hit $2.7bn in 2015, Stryker’s bet makes sense. And Stryker is not alone in placing a large stack of chips on red: the past year has seen the two biggest medtech firms, Johnson & Johnson and Medtronic, buying their way into the Chinese orthopaedic sector too.
A spin of the wheel
At HK$7.50 per share, Stryker’s offer was a 45% premium over Trauson’s share price at closing on January 8, when trading in Trauson was halted in advance of the announcement. Trauson’s stock has since jumped 40%.
Trauson’s sales in 2011 totalled around $60m, and it is believed to have gross margins of 60% or more. This is exactly what Stryker needs: its third-quarter 2012 international trauma and artificial joints sales fell 11%, and it was forced to cut its 2012 revenue projections.
Stryker says when it closes in the second quarter the Trauson deal will be neutral to diluted net earnings per share this year, excluding acquisition and integration costs, and accretive thereafter.
Trauson's controlling shareholders – its founder and chairman, Qian Fuqing, and his wife, Xu Yanhua – accepted the offer and tendered 62% of the Trauson shares. The couple’s stake is therefore worth around $460 million. Stryker and Trauson have had an alliance covering the manufacture of instrumentation sets since 2007.
The path to Beijing and beyond is well trodden. Medtronic bought the orthopaedics company Kanghui Holdings for $816m in September, and three months earlier Johnson & Johnson acquired the surgical device company Guangzhou Bioseal Biotech for an undisclosed price.
Investors certainly seem to think that the buyout bandwagon will keep rolling: shares in Trauson’s competitors Golden Meditech and MicroPort Scientific, for instance, are up 19% and 9% respectively since yesterday.
In fact many of the big medtech groups, including Medtronic, St Jude Medical, Covidien and GE Healthcare, have opened R&D facilities in China recently, and they and others seem to be keeping a weather-eye out for M&A targets and potential partners.
It seems that merchants still travel the Silk Road in search of riches.