- Zimmer announced a massive $13.3 billion acquisition of Biomet.
- The deal creates the number 2 player in the $45 billion musculoskeletal market.
- Synergy estimates drive appeal, yet pro-forma valuation is not appealing enough for me.
Investors in Zimmer (ZMH) have reacted with great enthusiasm to the news that the company acquired Biomet in a huge deal.
This deal is one of the latest major deals being announced in the wider medical and healthcare industry this year. While the expected accretion, driven by expected synergies sounds very appealing, I don’t believe that the pro-forma combination’s valuation is appealing enough for me to initiate a position at current levels.
Acquisition Of Biomet
Zimmer announced that it has signed a definitive agreement under which it will acquire Biomet in a $13.35 billion deal. With the intended acquisition of the privately held company the new combination will become a leader in the $45 billion musculoskeletal industry.
Following the deal Zimmer will become the second-largest company in the market which treats muscle and orthopedic injuries. Zimmer will see greater diversification in the faster growing sub-industries like sports medicine, extremities and trauma products.
Zimmer stresses that the deal as well as Biomet itself fits its strategic framework which focuses on growth, operational excellence and prudent capital allocation. The latter seems a bit ironic as the company will incur huge amounts of debt to finance the deal.
Zimmer will pay an incredible $10.35 billion in cash while the remainder of the deal will be paid by issuing $3 billion in stock. The cash comes from existing cash balances, a $3.0 billion term loan and bridge loan facilities. As a result of the new equity being issued to pay Biomet’s shareholders, the latter group will own a combined 16% of Zimmer.
The deal is of course subject to regulatory approval and is expected to close in the first quarter of 2015.
Implications Of The Deal
Following the deal, Zimmer expects to generate $7.8 billion in revenues while reporting $2.8 billion in adjusted EBITDA. Adjusted earnings per share are seen to increase by double-digit percentages. Estimated synergies are expected to come in around $135 million in the first year after closing, steadily increasing towards $270 million by year three.
We know that Zimmer reported 3% growth in revenues to $4.62 billion last year. Net earnings came in at $761 million while Zimmer reported EBITDA of $1.4 billion. Based on the outlook for the combined entity, Biomet generates $3.2 billion in revenues while reported adjusted EBITDA of roughly $1.4 billion.
The $13.35 billion price tag values Biomet at roughly 4.2 times annual revenues and 9-10 times EBITDA. During the conference call, Zimmer disclosed that it anticipates earnings accretion of $1.15 to $1.25 per share in the first year after closing. This guidance is based on expected synergies of $135 million which is seen to double by 2017. Given the expected dilution in order to finance the deal, earnings accretion is expected to increase towards $2.00 per share by 2017.
Synergies And Shareholder Enthusiasm
Investors are thrilled about the deal which can partially be explained by rather sizable cost synergy estimates. Estimated synergies will top at $270 million in year three following the deal. Combined with the hefty price-earnings ratios being paid in the sector, this could boost the valuation significantly.