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Timing looks right for Biomet IPO

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The owners of Warsaw-based Biomet Inc. may have gotten the timing right this time.

The group of private equity funds that acquired Biomet in June 2007 last week filed to take the company back onto the public markets, selling $100 million in stock later this year.

The company is owned by Blackstone Group, Goldman Sachs, KKR & Co. and TPG Capital.

Their timing the first time was poor. Three months after the group paid a whopping $11.4 billion for Biomet, orthopedic implant makers settled with the U.S. Department of Justice, agreeing to alter their cozy consulting relationships with surgeons, which dampened sales. Then three months later, the national recession hit, causing a sharp deceleration in growth rates of knee and hip replacements.

This time, Biomet’s owners are hitting the orthopedics market on the upswing, according to Bernstein Research analyst Lisa Clive. In a March 7 report to investors, Clive noted that domestic consumer sentiment continues to strengthen, which suggests more Americans will continue to go back to get the hip and knee replacements they put off during the prolonged economic downturn.

That trend emerged in the second half of 2013 and now looks like it will continue throughout this year.

“In the U.S., the demand-driven nature of the health care system means that we should see a continuation of the orthopedic market recovery that began in the second half of 2013, as consumer sentiment trends continue to stabilize close to pre-recession levels,” Clive wrote. She predicts U.S. knee implant sales will grow 5 percent and hip sales 6 percent this year, excluding currency fluctuations.

Biomet’s sales of knee implants have grown faster than the industry the past two years, according to Clive. Biomet sales of hip implants equaled the industry’s in 2013 and exceeded it the year before.

Despite global recession headwinds, Biomet has increased its profitability since 2007, financial reports to its public bondholders show.

Biomet has seen earnings before interest, taxes, depreciation and amortization rise, when adjusted for extraordinary items, from $719 million in 2007 to nearly $1.1 billion last year, according to a Deutsche Bank Securities Inc. analysis.

Cash flow from operations was $440 million in 2007, but now stands at $523 million.

Part of those improvements came through sales growth, from $2.1 billion in 2007 to nearly $3.1 billion last year. Sales to markets outside the United States and Europe more than doubled, from $205 million to more than $480 million. Biomet also acquired the trauma implant business from crosstown rival DePuy Orthopaedics Inc., which helped boost overall sales.

And part of the improvement has come from cutting more than $170 million in annual expenses. By June 30, Biomet will have closed seven of the 18 factories it operated in 2007, according to Deutsche Bank.

Still, Deutsche Bank analyst Kristen Stewart estimates the value of Biomet’s entire business at $11 billion to $13 billion—not far from the price the owners paid seven years ago.

That’s largely because growth prospects for orthopedic implant makers, in spite of recent improvements, are still not where they were in 2007.

“A lot has changed since Biomet was taken private, and the overall growth for the worldwide hip/knee market outlook has slowed from the high-single-digit growth rate experienced in 2007 to the low- to mid-single-digit growth expected in 2014,” wrote Glenn Novarro, an analyst at RBC Capital Markets.

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