LONDON (Alliance News) - Smith & Nephew PLC said Monday it will acquire medical devices company ArthroCare Corp for USD1.7 billion, in order to bolster its sports medicine business.
Smith & Nephew will pay USD48.25 per share for the Texas-based firm, which it said is a 20% premium over ArthroCare's 90-day volume-weighted average share price. ArthroCare shares closed Friday on NASDAQ at USD45.38 per share.
The UK medical technology company said it expects cost and revenue synergies from the acquisition of around USD85 million to its annual trading profit in the third full year.
The acquisition will be financed from its debt facilities and cash balances, including Smith & Nephew's existing USD1 billion revolving credit facility and a new two-year USD1.4 billion term loan facility with Barclays PLC and J.P Morgan Chase & Co. The company expects to complete the acquisition in mid 2014.
Smith & Nephew said it has suspended its share buy-back programme due to the acquisition. It has completed USD226 million of the USD300 million share buy-back programme.
The acquisition comes after a former senior executive of ArthroCare pleaded guilty to a scheme to defraud the ArthroCare's shareholders of USD400 million. The company announced on January 7 that it would pay a USD30 million fine to resolve the investigation by the US Department of Justice.
The Justice Department charged the company with conspiracy to commit securities fraud and wire fraud. However, it has entered into a two-year deferred prosecution agreement with ArthroCare, whereby ArthroCare must meet the Justice Department's requirements to avoid charges.
"ArthroCare and Smith & Nephew know each other well from our licensing and supply agreements, and this is a natural transaction for both companies," said ArthroCare Chief Executive Officer of ArthroCare David Fitzgerald in a statement.
An analyst at Numis Securities Limited called the acquisition a "solid move", saying that it is fairly low risk. Numis raised its price target for Smith & Nephew to 1,000 pence from 960p. Smith & Nephew shares were trading up 1.5% at 889.00p Monday afternoon.
Berenberg agreed that the "strategic rationale for the acquisition is sound", and Arthrocare's products would be a reasonable fit for Smith & Nephew. The acquisition would bring Smith & Nephew back to the ear, nose and throat market after 13 years, Berenberg notes, after it sold its ENT business to Gyrus for GBP52.5 million in 2001.
Berenberg did note that, whilst the acquisition price was a 20% premium over the 90-day volume-weighted average price for ArthroCare, it was just a 6% premium over its last closing price, leaving it potentially open to an interloper to come in with a higher bid before the acquisition is passed by shareholders. The broker said it didn't think the deal was a "must do" deal for Smith & Nephew, "so if a strategic shareholder seeks to try and extract a higher price, we are not convinced that Smith & Nephew will be forthcoming."
However Berenberg said that "the bigger risk, in our view, is simply that a significant number of ordinary shareholders view the 6% premium as unacceptabl(y)" small.
By Hana Stewart-Smith; hanassmith@alliancenews.com; @HanaSSAllNews
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