The Wall Street owners of Biomet, Inc. are ready to cash out.
That’s what the Financial Times of London reported on July 1, 2013. According to “three people with knowledge of the situation, ” the company’s Wall Street owners are contemplating relisting the company as a public company. According to the same sources, the company may also be for sale.
Bill Kolter, Biomet’s corporate vice-president of Government Affairs, Public Affairs, and Corporate Communications, told us on July 2 that the company doesn’t comment on rumors.
2011 Biomet/Smith & Nephew Rumors
The Times has a good track record when it comes to Biomet. A couple of years ago, the paper reported on rumors of a possible merger between the Warsaw, Indiana-based hip and knee maker and London-based Smith & Nephew, Europe’s largest hip and knee maker. Those rumors were also based on anonymous people with knowledge of the situation. After initially declining to comment, the companies eventually disclosed they had indeed held meetings about a potential merger. Those efforts were halted after information about the meetings became public.
Biomet CEO and President Jeff Binder is sure to be quizzed about the most recent rumors on July 11 when he hosts a regularly scheduled quarterly conference call with Wall Street analysts.
Biomet Saga
Speculation about the future of Biomet has never died since Wall Street investment banks, led by the Blackstone Group, Goldman Sachs, Kohlberg Kravis Roberts (KKR) and TPG Capital, took the company private in 2007 in an $11.4 billion leveraged buyout deal. In March 2006, company Founder and CEO Dane Miller quit after undisclosed disagreements with outside board members, which included Marilyn Quayle, wife of former U.S. Senator and Vice President, Dan Quayle of Indiana.
Miller returned like Napoleon from exile with the Wall Street banks to retake the company. Binder was hired as CEO in February 2007. But the deal left the company saddled with the highest debt load in the industry. After losing some market share, operations improved after the buyout as the company increased its market share in hips and knees and improved its operating margins.
The company also tried to grow through acquisition. In June 2012, Biomet acquired Johnson & Johnson’s (J&J) DePuy Orthopaedics, Inc.’s trauma business for $280 million in cash.
Biomet Performance
According to BMO Capital Market analyst, Joanne Wuensch, before the buyout, Biomet held 10% of the worldwide hip market. Today, she estimates Biomet holds 11.7% of the market. Knees have done even better. The company went from 12% of the market in 2007 to 14% in 2012. She also noted that operating margins improved from 23% in 2007 to 30% in 2012. As a comparison, competitors Zimmer Holdings, Inc. and Stryker Corporation have 2012 operating margins of 29.5% and 24%, respectively.
However for the most recent quarter, the company reported an operating loss of $237.4 million, compared to operating income of $108.1 million during the same quarter of 2012. Reported net loss during the quarter was $304.5 million, compared to $16.5 million last year.
Company Worth
So what’s the company worth today after six years of private operations?
According to the Times, after paying $11.4 billion, including debt, in 2007, KKR is valuing the investment made on its balance sheet at about 20% below its initial cost as of March 2013.
At the end of May 2007, Biomet’s revenue was $2.1 billion. At the end of February 2013, revenue reached about $3 billion. Debt dropped from $6.3 billion in 2007 to approximately $5.9 billion today. EBITDA (earnings before interest, taxes, depreciation and amortization) has climbed to $946 million from $587 million in 2007, according to the Times report.
One of Biomet’s competitors, Stryker, is valued at about 8.5 times EBITDA, which would give Biomet a theoretical valuation of $8 billion, including debt. If KKR figures it has taken a 20% hit on its balance sheet, the company would be worth about $9.1 billion, including debt.
Industry Consolidation
Wuensch told us that it was important to think of the big picture of orthopedics where critical mass has become more important. Hospital paymasters are increasingly making final purchasing decisions and limiting the number of products available to hospital-employed surgeons.
As Wuensch told the Times, this brings us back to Smith & Nephew as a potential buyer of the company. Biomet’s U.S. competitors, all larger than Biomet and S&N, would certainly face steep regulatory hurdles as evidenced by J&J’s need to rid itself of its trauma business before getting approval to buy Synthes, Inc.
Marriage of Convenience
“It is commonly thought that Smith & Nephew and Biomet, which are the 4th and 5th largest companies by market share in the sector, will get together at some point, ” Wuensch said in a previous interview.
And S&N could use the help of Biomet’s growth. According to Wuensch, at the end of the last quarter, S&N’s growth rate in hips and knees each slowed by 6%, while Biomet’s growth rate grew by 1% for each product. S&N’s hip market share dropped to 12% from 12.6% a year ago as Birmingham Hip Resurfacing sales continue to be negatively impacted by metal-on-metal issues.
Biomet continues to see strong sales from the Taperloc system in Japan and an expanded sales force bag with the recent launch of its Signature Personalized Patient Care system for acetabular cup placement and initiation of the clinical evaluation for its next generation multi-bearing acetabular system, G7 Acetabular cup.
In knees, S&N not only lost .7% market share to 12.5% of the market, but was the biggest loser. Biomet gained .3% to 14.4% of the market.
Smith & Nephew’s Acquisition Foibles
Smith & Nephew has been trying to grow through acquisition for some time. In 2003, the company lost a bidding war with Zimmer to acquire its European competitor, Swiss-based Centerpulse. In November 2006, S&N acknowledged talks with Biomet to buy the company for around $11 billion before losing out to the Blackstone led group. The 2011 rumors noted earlier were coupled with reports that S&N’s board of directors rejected an $11 billion offer from J&J to be acquired, before J&J bought Synthes.
Cashing Out
The July 1 Times story said the move to put Biomet into play “underscores the private equity groups’ willingness to tap into the initial public offering market that has grown more welcoming for highly indebted companies over the past year, to start exiting expensive deals made during the credit bubble.”
Blackstone and company were unsuccessful in making a deal to acquire S&N and consolidate the 4th and 5th size players in orthopedics. Their attempt to join J&J as a superpower fell short. Maybe the investment banks think the time is ripe to make a deal to cash out their 2007 investment and get back to doing what Wall Street investment banks do, which is making deals and let Biomet do what manufacturing companies do, which is to make and sell products.
