Smith & Nephew plc agreed to buy ArthroCare Corp. for $1.7 billion in cash to add products for minimally invasive surgery used in sports medicine.
ArthroCare holders will receive $48.25 a share in cash, London-based Smith & Nephew said in a statement today. The price is 6.3 percent higher than the Austin, Texas-based company’s closing level Jan. 31 in Nasdaq trading. ArthroCare rose above the takeover price, indicating some investors are speculating on a higher offer.
ArthroCare makes products used in arthroscopic surgery on shoulders and knees that will enhance Smith & Nephew’s business, the U.K. company said. Cost reductions and additional sales will boost Smith & Nephew’s annual profit by about $85 million in the third full year after the purchase is complete, said the company, which also makes sports-medicine surgical equipment as well as artificial hips and knees.
“This is a great deal that rebalances Smith & Nephew in areas of higher growth,” Olivier Bohuon, chief executive officer of Smith & Nephew, said on a call with reporters today.
ArthroCare climbed 7.4 percent to $48.75 at 9:40 a.m. in New York. Smith & Nephew climbed 1.8 percent to 891.50 pence, giving the company a market value of 7.9 billion pounds ($12.9 billion). The stock returned 23 percent in the year through Jan. 31, compared with an 18 percent return for the Bloomberg World Health Care Products Index.
ArthroCare shares jumped 15 percent on Jan. 8 after the company signed an agreement with the U.S. Justice Department over allegations of securities fraud under the company’s previous management. The settlement made a takeover more plausible, Raj Denhoy, an analyst at Jefferies LLC, said at the time.
“The strategic rationale for the acquisition is sound,” Tom Jones, an analyst at Berenberg Bank in London, said in a report. ArthroCare gets 68 percent of sales in the Americas, while Smith & Nephew has a larger presence in Europe and emerging markets, he said.
Selling ArthroCare products outside the U.S. should be “a relatively straightforward exercise,” he said.
Because the premium to the Jan. 31 price is so small, there’s a risk that another bidder comes in before ArthroCare shareholders vote on the deal, he said. On a conference call with analysts, Smith & Nephew executives declined to say whether there were other bidders for ArthroCare.
The acquisition price is 20 percent above ArthroCare’s average price for the past 90 days, Smith & Nephew said. The U.K. company’s investment bankers on the deal were JPMorgan Chase & Co. and Centerview Partners. Piper Jaffray & Co. and Goldman Sachs Group Inc. advised ArthroCare.
The purchase values ArthroCare at 15.7 times adjusted 2012 earnings before interest, tax, depreciation and amortization, Smith & Nephew said. The U.S. company had net sales of $368 million and earnings of $94.6 million in 2012.
ArthroCare has a technology called coblation that uses high-frequency energy and natural saline to dissolve target tissue and preserve healthy tissue. Its oblation products are used in minimally invasive orthopedic surgeries involving shoulders, knees and hips, as well as the ear, nose and throat, a new area for Smith & Nephew.
Total revenue for the first three quarters of 2013 was $276 million, an increase of 2% over the year earlier period. The company reports fourth-quarter earnings Feb. 13.
Smith & Nephew suspended its share buyback because of the acquisition. The company has bought $226 million of shares under the $300 million program, it said.