Zimmer Holdings Inc.'s shares soared Thursday after it announced plans to acquire life sciences rival Biomet Inc. for $13.4 billion.
The deal between the two Indiana-based businesses would create the second-largest company in the orthopedic device industry.
Zimmer's stock rose to a 52-week high of $108.33 per share before closing at $101.97 Thursday, a rise of 11.5 percent on the day.
The purchase will end a planned initial public offering by closely held Biomet’s parent, Biomet Group Inc., Warsaw-based Zimmer said Thursday in a prepared statement.
The 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 deal will help Zimmer, a maker of artificial hips and knees, 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 in the industry have started to accelerate after the recession prompted 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, N.J.
“This will give Zimmer some leverage when they go to hospitals, and help them compete,” McGorman said. Also, “they get a little more in terms of products in other areas, like sports medicine, extremities and trauma, where Zimmer has less exposure.”
Zimmer and Biomet, which are located in the same city, 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 to $1.25 a share in earnings during the first year, James Crines, Zimmer’s chief financial officer, said on a conference call.
The savings and increased earnings starting in the first year after the acquisition were embraced by investors, who sent Zimmer’s shares to its highest intraday value since July 2001. The company’s shares had gained 23 percent in the 12 months through Wednesday.
“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, making the market’s reaction a logical response.
“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.
Zimmer’s announcement follows a flurry of deals among drugmakers this week. Novartis AG agreed to buy GlaxoSmithKline Plc’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 and Co. for $5.4 billion. Valeant Pharmaceuticals International Inc., meanwhile, announced a bid to buy Allergan Inc. for $45.7 billion.
Zimmer said it’s confident it will get the deal through regulators and close by the first quarter of 2015.
The acquisition will push three of the companies’ combined product groups above the $1 billion mark, 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, said CEO David Dvorak during the call.
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.
“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 Thursday. “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.”