Smith & Nephew, the British medical technology giant, has agreed to buy ArthroCare, an American specialist in sports medicine, for an enterprise value of $1.5 billion.
Treating injured athletes is a faster-growing business than selling artificial hips and knees, Smith & Nephew’s traditional focus. And because of the target’s own self-inflicted injuries, the buyer is paying the slimmest of premiums.
The price equates to about 15.5 times the roughly $97 million in earnings before interest, taxes,depreciation and amortization, or Ebitda, that analysts reckon ArthroCare will make in 2014. That looks impressive, given that American “medtech†giants trade at roughly 10 times. But the valuation multiple has to be seen in context. Smith & Nephew expects annual synergies of $85 million, largely through cost cuts. That would drastically reduce the effective multiple.
The $48.25 offer is only 6 percent above the last close, suggesting more strongly that Smith & Nephew received a bargain. Even over three months, the premium is a scant 20 percent. Against that, analysts’ average price target is $51.17, Datastream shows. In the sell side’s collective wisdom, investors would do better to stay put.
That is a little odd, as is the fact that ArthroCare just struck a “deferred prosecution agreement†with the United States Justice Department, concluding a six-year investigation into earnings manipulation. That the board can sell up so readily a month later seems strangely pessimistic. Then again, revenue barely grew in 2013. Maybe a bigger parent could do better.
The presence of One Equity Partners may also be a factor. Following a rescue financing in 2009, the buyout firm controls 17 percent of the voting rights. One Equity Partners paid $75 million then. Its stake now is worth more like $290 million. So it doesn’t need to haggle over the final dollar to get a handsome exit.
A counterbidder is possible but unlikely, because Smith & Nephew is a better fit, and so has more potential synergies, than other bidders. Given this is a friendly deal, shareholders might struggle to force a sweetener out of Smith & Nephew.
Smith & Nephew’s chief executive, Olivier Bohuon, had a good run since taking over in 2011. The onus is on him to prove sports medicine is as promising as it looks. This is no time to trip up.
Quentin Webb is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
