J&J Agrees to Buy Synthes for $21.3B in Cash, Stock
Deal brings it a device company with 35% operating margin, and 50% market share in trauma.
Johnson & Johnson agreed to buy Synthes Inc. for $21.3 billion, adding devices to treat bone fractures and trauma in the biggest purchase in the company’s 125-year history.
Synthes holders will receive 159 Swiss francs a share in cash and stock, the companies said in a statement today. That’s 8.5 percent above the closing price yesterday and 15 percent higher than April 15, the last trading day before Synthes said it was in talks. Synthes is based in West Chester, Pennsylvania, and the company’s stock trades in Switzerland.
The purchase will give J&J a device company with almost half the trauma market and an operating margin of 35 percent, the highest among medical-products makers with stock values of more than $5 billion. New Brunswick, New Jersey-based J&J, the world’s second-biggest seller of health products, has had more than 50 drug and device recalls since the start of 2010.
“In trauma, Synthes has 50 percent market share as well as scale and margins,” Navid Malik, an analyst with Matrix Corporate Capital LLP, said in an interview today. “It certainly complements J&J’s orthopedics business.”
Synthes Chairman Hansjoerg Wyss, the company’s founder, and related entities have agreed to vote at least 33 percent of the company’s stock in favor of the deal, the companies said. The sale may make Wyss the richest person in Switzerland, surpassing biotechnology billionaire Ernesto Bertarelli.
Synthes’s Value
Synthes holders will receive 55.65 francs a share in cash, and 103.35 francs a share in J&J stock, according to the statement. The stock portion of the payment can fluctuate with Synthes holders receiving as few as 1.7098 J&J shares and as many as 1.9672 depending on the U.S. company’s share price in the days before the acquisition closes.
The purchase values Synthes at about 11.2 times this year’s forecast earnings before interest, tax, depreciation and amortization, according to Bloomberg data. Acquirers of medical- products companies paid a median of 11.5 times profit in the past five years, the data show.
J&J probably will have to divest some businesses to win antitrust approval, which limits the price it’s willing to pay for Synthes, Lisa Bedell Clive, an analyst with Sanford C. Bernstein & Co. in London, said in a telephone interview today.
“It’s a fair price,” she said. “I didn’t expect much more than that given the potential for divestments, particularly on the spine side.” The firm has a “market perform” rating on Synthes stock.
Antitrust Review
Synthes rose 70 centimes, or 0.5 percent, to 147.2 francs at 12:15 p.m. in Zurich trading. Before today, the stock had returned 17 percent, including reinvested dividends, in the past year, compared with a 9.3 percent loss for the Bloomberg World Health-Care Products Index.
The stock may be trading so far below the offering price because some investors are concerned the purchase may not go through, according to Malik. Some J&J shareholders may not want the company to tackle the largest acquisition in its history until its problems have been fixed, he said.
The deal will close in the first half of 2012, the companies predicted. The purchase is subject to antitrust review in the U.S. and the European Union, and requires the approval of Synthes shareholders, according to the statement.
J&J plans to combine Synthes, the biggest maker of devices to treat bone fractures and trauma, with its DePuy unit. Together, they will become the largest part of J&J’s medical devices and diagnostics segment, the companies said. Pfizer Inc. is the world’s biggest seller of health-care products.
