Deals

Smith & Nephew strengthens global sports medicine business through agreement to acquire ArthroCare for $1.7 billion

Posted: 3rd February 2014 09:15
Smith & Nephew plc (LSE: SN, NYSE: SNN), the global medical technology business, today announces the execution of a definitive agreement to acquire medical device company ArthroCare Corp. (NASDAQ: ARTC) for $48.25 per ArthroCare share in cash, a total consideration of approximately $1.7 billion and an enterprise value of $1.5 billion.
Commenting, Olivier Bohuon, Chief Executive Officer of Smith & Nephew, said:

"This is a compelling opportunity to add ArthroCare's technology and highly complementary products to further strengthen our sports medicine business. Together, we will be able to generate significant additional revenue from the more comprehensive portfolio, combined sales force and Smith & Nephew's global footprint. With this transaction, we are again accelerating our strategy to rebalance Smith & Nephew towards higher growth."

Strategic rationale
  • Creation of a comprehensive resection and repair portfolio with exciting growth prospects.
-    In resection, the combination of ArthroCare's latest generation of radio frequency (RF) technology and Smith & Nephew's strong mechanical blade portfolio gives customers greater choice.
-    In joint repair, ArthroCare's shoulder anchor innovation strongly complements our strength in knee repair, forming an extensive, integrated portfolio.
  • Additional revenue opportunities from combined global footprint and channel presence.
-    Cross-sell the combined portfolio and build upon shared capabilities in marketing and customer targeting.
-    Utilise Smith & Nephew's more extensive and established global footprint to introduce ArthroCare's products to new customers and markets.
  • Adjacent Ear, Nose & Throat (ENT) business provides new growth opportunities.
-    Ability to expand this strong US business into new global markets.
-    Prospects to utilise Smith & Nephew's minimally invasive technologies to develop product range further.
  • An enhanced pipeline.
-    Stronger combined new product pipeline and R&D expertise will accelerate delivery of future innovation.
 
Financial rationale
  • Substantial cost and revenue synergies expected to add approximately $85 million to annual trading profit1 in the third full year.
-    Opportunities include cross-selling in established markets, expanding into new and emerging markets and maximising efficiencies across the combined business.
-    One-off transaction expenses and integration costs expected to be around $100 million incurred over a three year period.
  • Meets Smith & Nephew's investment criteria.
-    Acquisition expected to generate a return on capital employed exceeding Smith & Nephew's cost of capital in third full year.
-    Accretive to adjusted earnings per share2 from first full year.
 
The purchase price represents a 20% premium over the 90-day volume weighted average price of ArthroCare's shares prior to this announcement. It represents a multiple of 15.7 times EV/adjusted 2012 EBITDA.

The acquisition will be subject to customary conditions, including a vote of ArthroCare's shareholders and governmental clearances. Pending the satisfaction of such customary conditions, Smith & Nephew anticipates closing the transaction in mid-2014. ArthroCare will be integrated swiftly to minimise disruption to customers.
David Fitzgerald, President and Chief Executive Officer of ArthroCare, commenting on the transaction said:
"ArthroCare and Smith & Nephew know each other well from our licensing and supply arrangements, and this is a natural transaction for both companies. The Board believes that this transaction is in the best interest of our shareholders."

ArthroCare shareholder undertakings

One Equity Partners, the largest shareholder with convertible preferred shares equivalent to 17% of the equity, has committed to vote its shares in support of the transaction, subject to customary conditions. The Board of ArthroCare has recommended the transaction.

Financing

The purchase price of $48.25 per ArthroCare share, or total consideration of $1.7 billion (enterprise value of $1.5 billion net of cash in ArthroCare) will be financed from Smith & Nephew's debt facilities and cash balances, including the existing $1 billion revolving credit facility and a new two-year $1.4 billion term loan facility. The term loan has been underwritten by Barclays and J.P. Morgan.

Smith & Nephew has completed $226 million of its $300 million share buy-back programme. In light of this acquisition Smith & Nephew has suspended this programme.

At the end of 2014 we expect Smith & Nephew's net debt to EBITDA to be below 1.5 times.

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