Zimmer Holdings (Warsaw, Indiana) made a last-minute $3.21 billion bid for Centerpulse AG (Zurich, Switzerland) last month just as earnest suitor Smith & Nephew plc (S&N; London) was in the process of sealing its own deal for Europe's largest maker of orthopedic devices. Zimmer reported May 20 its offer to acquire Centerpulse in a cash-and-stock deal that topped S&N's offer by about $860 million, or about 19%.
The new union would instantly create the No. 1 pure-play orthopedics company, with nearly a 30% share of the reconstructive market, topping the No. 3 position that would be attained via the S&N-Centerpulse combination. That would place it ahead of DePuy (Warsaw, Indiana) and Stryker (Kalamazoo, Michigan) in the orthopedics hierarchy.
Zimmer said it plans to offer about CHF 120 and 3.68 of its shares for each Centerpulse share held. The deal values each Centerpulse share at about CHF 350. The deal also would include a separate offer to acquire Swiss investment company InCentive Capital AG (Zug, Switzerland), which owns about 19% of Centerpulse's outstanding shares, under terms similar to the offer for the company.
In March, S&N agreed to acquire Centerpulse in a cash-and-stock deal valued at the time at about 1.5 billion pounds, worth about $2.45 billion today, and the company was on the verge of completing the deal. Just the day before Zimmer's announcement, S&N's shareholders had authorized the company's board to complete the acquisition.
Some analysts speculated at the time of the initial proposal that Zimmer might consider topping the offer. But bankers had said that move would prove difficult because InCentive Capital had accepted the British company's offer. Zimmer had expressed an interest in Centerpulse last year, but never made an offer.
In a letter to Centerpulse's Chairman and CEO, Max Link, Zimmer Chairman and CEO Raymond Elliott said that he believes his company's proposal is "financially and strategically superior to Smith & Nephew's offer, both immediately and over the long term," and would create the No. 1 pure-play orthopedics company with estimated sales of more than $2 billion.
Many shareholders and analysts had said they felt that the S&N offer significantly undervalued Centerpulse. Swiss-based investor Braun von Wyss & Mueller AG, which is one of the company's biggest shareholders, said the offer from Zimmer was interesting, adding that the bid on the table from S&N was too low. "I'm not going to tell you what we are going to do, but the new offer is obviously interesting. We have said all along that the price offered by Smith & Nephew was far too low," George von Wyss, senior partner with the institution, told Reuters.
Calling the Zimmer proposal a "ninth-inning bid," J.P Morgan (New York) medical technology analyst Michael Weinstein said in a research report that from a financial standpoint, the transaction would be immediately accretive to Zimmer, given the terms and Zimmer's relative valuation. However, he noted, "What's surprising, in our view, is management's decision at such a late stage to try and get into the Centerpulse game. Management had stated previously that it viewed Centerpulse as fully valued, and as such today's offer strikes us as a real reversal of direction, leading us to ask first and foremost, 'What's changed?'"
On one hand, he noted that the acquisition of Centerpulse makes strategic sense, based on the companies' respective technologies and market positions in varying geographies. However, he observed that "big is not always better," and that while earnings in 2004-06 would likely be higher with the combination, the valuation investors may be willing to pay for the company going forward is likely to change. Weinstein also said that to win Centerpulse, he suspects that Zimmer will likely have to increase its bid "beyond today's initial foray." He based this in part on Centerpulse management's clear disinterest in negotiations with Zimmer, and the likely premium that will be required over any counteroffer by S&N.
A deal between Zimmer and Centerpulse would couple Zimmer's reconstructive products and minimally invasive procedures and technologies in the U.S and Japan with Centerpulse's orthopedics and platforms in spine and dental products in Europe, Zimmer said. Despite the prospects of a potential bidding war with S&N, Elliott told analysts in a conference call, "This is a major deal and we are committed to winning this one."
He said the deal would provide Zimmer with access to Centerpulse's spinal surgery products, the fastest-growing segment of the orthopedics industry with gross profit margins in the 80% range. When questioned during the call as to why the company waited until the last minute to make its proposal, Elliott maintained that his company has been interested in Centerpulse for quite some time and he alluded to an offer that his company made for the Swiss company back in October. "What changed the situation, of course, was the Smith & Nephew offer," Elliott said. He added that Centerpulse and Zimmer discussed the possibility of a merger several times last year and noted that his company provided Centerpulse with a preliminary written offer in October that indicated it was prepared to increase its offer based upon new information.
He also pointed out that since October, Centerpulse, formerly known as Sulzer Medica, has clarified and financed its product liability issues related to faulty hip and knee implants, and has successfully divested its cardiovascular businesses, including Vascutek (Glasgow, Scotland) and IntraTherapeutics (St. Paul, Minnesota), as well as improved its continuing operations.
Centerpulse said its board would consider the Zimmer offer, despite the preliminary agreement with S&N. "The board of Centerpulse will discuss the offer under consideration of all interests, including those of our customers, shareholders and staff," Centerpulse spokesman Erwin Schaerer said in a statement.
Zimmer, which was spun off from Bristol-Myers Squibb (New York) in 2001, said it planned to launch a formal offer by June 17 and said it hopes the deal would close by the end of August.
New firm closes on initial $216M fund
Thomas, McNerney & Partners (New York), a newly formed healthcare private equity firm that invests in life science and medical technology, reported the closing of its initial fund, totaling $216 million, raised from what it called "a broad mix of institutional investors, including pension funds, university endowments, foundations and insurance companies." Thomas, McNerney & Partners has as its mission "to invest in companies at all stages of development in the medical device, biotechnology and pharmaceutical sectors as well as related fields." It said that its partners have nearly 60 years of combined healthcare investing and operating experience, "including more than 35 years as active private equity investors."
The firm is seeking "to back organizations with strong management teams, sound business models and the potential to grow into market leaders" and said it will focus on investments of $10 million to $20 million per company. "Historically, this investment flexibility and focus on fundamentals have allowed us to make successful investments and exits in all market cycles," said James Thomas, managing partner. The company was founded by Thomas and two other managing partners, Pete McNerney and Karen Boezi. Thomas came from E.M. Warburg, Pincus & Co., where he led the healthcare technology private equity practice. McNerney and Boezi came to the firm after overseeing the healthcare investment practice for Coral Ventures.
The firm recently added Venture Partner Alex Zisson, a former managing director and leader of healthcare equity research at JPMorgan H&Q, and Chief Financial Officer Susan Haedt, who has more than 16 years of financial services and CFO experience.
McNerney said, "We appreciate the endorsement of our team and strategy by the limited partners, as indicated by the size of the fund, given difficult market conditions. Despite the current economic and political conditions, the pace of innovation in the healthcare technology field is substantial, and we intend to capitalize on the significant long-term growth opportunity it represents."
Besides its New York headquarters, the company has offices in Minneapolis, Minnesota, and San Francisco, California, thus being situated, it said, "in three major hubs of life science and medical technology innovation."
Genzyme folds three units together
In a move that pleased Genzyme General shareholders but not those of one of its units, Genzyme Corp. (Cambridge, Massachusetts) said last month that it plans to gather its three divisions Genzyme General, Genzyme Biosurgery and Genzyme Molecular Oncology under one trading stock, beginning July 1. Beginning in the third quarter, all three will be represented under GENZ, the stock symbol for Genzyme General.
The move calls for Genzyme Biosurgery shareholders to receive 0.04914 of a share of Genzyme General stock for each share of Biosurgery stock. Genzyme Molecular Oncology shareholders will receive 0.05653 of a share of General stock for each of their shares.
When looking at the new additions to Genzyme General, the most notable is Synvisc, for osteoarthritis, which is bringing in about $150 million yearly in sales, according to a research note by Mike King, analyst with Banc of America (San Francisco, California).