And they said it could not happen. Zimmer’s $13.4bn purchase of Biomet will be the fourth-biggest deal in the history of medtech, and it is in an area that is already heavily consolidated: orthopaedics.
A merger of Zimmer and Biomet, currently the third and fifth-largest orthopaedics companies by worldwide sales, would create a company with revenues of nearly $9bn in 2018, EvaluateMedTech data show. The combined firm would leapfrog Stryker to become the second largest in its sector, controlling more than a fifth of the market for replacement joints. The $20bn tie-up of Johnson & Johnson’s DePuy with Synthes in 2011 had many wondering if further consolidation of the sector could happen. It looks like Zimmer believes this to be entirely possible.
|Top 5 M&A deals in the history of medtech|
|Rank||Announcement date||Acquiring company||Target company or unit||Deal type||Value ($bn)|
|1||December 5, 2005||Boston Scientific||Guidant||Company acquisition||27.0|
|2||April 27, 2011||Johnson & Johnson||Synthes||Company acquisition||19.7|
|3||April 15, 2013||Thermo Fisher Scientific||Life Technologies||Company acquisition||13.6|
|4||April 24, 2014||Zimmer||Biomet||Company acquisition||13.4|
|5||May 8, 2006||Thermo Fisher Scientific||Fisher Scientific||Reverse takeover||10.6|
The cash-and-stock deal, set to close in the first quarter of 2015, includes the assumption of net debt. At closing, Zimmer’s shareholders are expected to own 84% of the combined entity, with Biomet’s investors pocketing the rest. Zimmer’s shares reached $105.24 in early trading on the NYSE, an increase of 15%.
Both companies are active in joint reconstruction, particularly specialising in artificial hips and knees. This area is expected to grow faster than it has in years, as economies recover from recession, freeing up patients to push ahead with elective orthopaedic operations (Healthier economy lifts dental and ortho but wider recovery uncertain, February 18, 2014).
Zimmer says it expects to achieve annual savings of around $270m by 2018, $135m of which will come in the first year post-close.
The similarity of the companies' operations raises the obvious question of the extent to which the deal will run into antitrust issues. When the hip and knee player DePuy bought the much less similar target Synthes, a trauma specialist, competition law forced the sale of DePuy’s relatively few trauma products. Biomet picked them up pretty cheaply, paying $280m.
The sizeable overlap between Zimmer and Biomet puts the takeover at the mercy of the FTC. Lisa Bedell Clive, an analyst at Bernstein, wrote today that she “seriously doubt[s] Zimmer would have announced this transaction without having thoroughly explored the antitrust ramifications”.
|Top 5 orthopaedics companies|
|Total WW sales ($m)||Market share|
|Johnson & Johnson||8,929||10,475||+3%||26.4%||24.8%|
It is certainly to be hoped that the buyer has been conscientious in its due diligence. But the FTC is not afraid to use its claws if it has to. Five years ago it kyboshed the $3.1bn merger between the Australian blood plasma products maker CSL and its US rival Talecris Biotherapeutics, saying that they were too similar (CSL’s reality check sinks Talecris deal, June 9, 2009).
Last year, Zimmer had 24% of the hip market and Biomet 12%, according to EvaluateMedTech, and their shares of the knee space were 28% and 14% respectively. Combining the businesses would create an enormous lead over competitors such as Stryker and J&J in both segments.
Divestitures seem certain, and the FTC could insist on disposals so extensive the transaction is rendered unworkable.
The merger also puts a stop to Biomet’s plans to float. In March the group filed for an IPO with plans to raise $100m, but had not revealed further details (Orthopaedics companies seek to follow diagnostics in going public, April 4, 2014). Biomet’s private equity owners, which took it private for $11.3bn in 2007, raised $6.2bn of new debt when they bought the company, and much of that debt remains on the group's balance sheet.
Zimmer is to pay $10.4bn in cash and issue $3bn in shares to Biomet investors. The private equity companies will doubtless be delighted to get their exit via a sale instead.
If the takeover goes ahead it will alter the orthopaedic sector almost as drastically as did the DePuy-Synthes pact. But there is still an "if". The boards of both Zimmer and Biomet have approved the transaction – the FTC, as yet, has not.