Zimmer and Biomet. Just two crazy kids in love or an arranged marriage? New SEC filings reveal the behind the scenes story of this engagement. Here’s what happened.
In 2013, LVB Acquisition, Inc., the consortium of private Wall Street equity banks who had purchased Biomet, Inc. six years earlier, decided that capital market conditions were strong enough to test the Street’s appetite for a Biomet initial public offering (IPO). If they were right, then Biomet could not only raise new capital, but also pay off its sizeable debt and lay the foundation for its private equity owners to begin to cash out.
It also would open the door to a couple of corporate suitors.
$11 Billion in 2007
LVB bought Biomet in 2007 for about $11 billion from public shareholders after Biomet’s founder, Dane Miller, Ph.D. was spurned by his board—a board, incidentally, which included former Vice President Dan Quayle’s wife, Marilyn. After resigning as CEO, Miller pulled together a group of Wall Street private equity firms to launch a takeover bid, returning it to private company status.
The private equity firms he organized into the buying group included The Blackstone Group L.P., Goldman Sachs & Co., Kohlberg Kravis Roberts & Co. L.P. and TPG Capital.
In the six subsequent years Biomet’s sales grew, but with large debt to carry, the company did not show an operating profit until this year. The orthopedic market recovered from the Great Recession, the company had a good pipeline of new products and Baby Boomers needed new hips and knees like never before. So the time arrived for these private equity firms to see if they could get their six-year-old investment back.
Exit Strategy
The LVB board, which we will refer to as the Biomet board for this article, had a couple of strategic options. Sell the company to shareholders through an IPO or sell the company to another company—even, possibly, a competitor.
The board decided to pursue both options simultaneously and, as we know now, eventually opted to marry the company off to the boy down the street in Warsaw, Indiana—Zimmer Holdings, Inc. The marriage was arranged on April 23, 2014. It has yet to be consummated.
One might call it a homecoming for Dane Miller. He worked at Zimmer before breaking away and cofounding Biomet in 1977.
In an August 26, 2014 SEC S-4 filing, Zimmer disclosed what really happened between these two Warsaw-based rivals as they worked their way to a merger.
Warsaw Romance
According to the filing, after widely published reports that Biomet was considering an IPO, the board of directors of Zimmer met on December 13, 2013 with their financial advisor, Credit Suisse Securities, to evaluate the pros and cons of buying Biomet. The board directed President and CEO Dave Dvorak to call Biomet President and CEO Jeff Binder and, well, start the flirting.
Ironically, that very same day Biomet’s board was meeting with its financial advisor, BofA Merrill Lynch, to review plans for the IPO and a potential combination with another company—otherwise known as “Company A” in these SEC Filings. Who is “Company A”?
Wells Fargo analyst Larry Biegelsen speculated in an August 30, 2014 investor note that Company A was most likely Stryker Corporation or Smith & Nephew, plc. Both companies had also been in the news as a potential suitor for Biomet.
Binder and the bankers met with the CEO of Company A on December 23, 2013.
Zimmer Courts Biomet
The champagne bubbles from the New Year’s celebrations were barely gone when, that first week of 2014, Zimmer’s Dvorak reached out to Biomet’s Binder to begin the courtship. Would Binder, Dvorak wondered, be interested in a “business combination transaction?”
He asked Binder for a direct meeting to “talk over the state of the orthopedic medical device industry.” Presumably both men had spoken plenty of times about the state of the industry in their leadership capacities with AdvaMed, the industry’s trade association. Their headquarters are within minutes of each other. There was no mention of candles or wine in the SEC filing.
Binder checked with his board and agreed to meet with Dvorak on January 9, 2014.
At the meeting the CEOs talked about Biomet’s planned IPO, possible valuation ranges for Biomet, the logistical issues involved in a potential merger and what Zimmer’s strategies might be for paying for such a merger.
Biomet Plays Coy to $12 Billion Offer
Binder told Dvorak that Biomet’s board “had confidence in its strategy and prospects as an independent company. In other words, “We don’t need you.” But, Binder said the board might be willing to discuss a merger and Dvorak should make a proper proposal.
Dvorak updated his board on January 19. They agreed with him to float an all-cash transaction for $11 billion to $12 billion. Two days later, Dvorak passed along the offer range to Binder. He told Binder he was confident that Zimmer had the dowry to consummate the proposal. He also said the offer was conditioned on Zimmer being Biomet’s exclusive suitor for 60 days.
Binder again told Dvorak Biomet was confident on going alone and that the proposal “significantly” undervalued Biomet.
Two days later, on January 23, Biomet’s board and their bankers reviewed the proposal. They told Binder to tell Dvorak, no thanks because the offer was too low. Even if they could agree on a price, they needed “significant certainty of closing.”
Biomet’s Options Narrow
The next day, Binder spoke to the CEO of Company A. That CEO told Binder they weren’t interested in proposing. There would be no competitive offer to Zimmer, so the boy down the street started to look a little better. But, there was still the allure of that IPO boy in New York City.
Binder Asks for More
Binder contacted Dvorak to let him know there was no deal because his board felt confident of the potential pricing of the IPO. He told Dvorak that Zimmer would have to pay a “meaningful” premium for her hand.
In the first week of February, Biomet’s bankers came up with an IPO valuation in the $13.5 billion to $14 billion range.
Zimmer Sweetens Dowry to $12.75 Billion
On February 28, Zimmer’s board decided to up the ante to $12.75 billion, with $9.75 billion in cash and $3 billion in shares of Zimmer stock. Dvorak gave Binder the new proposal on March 5.
Two days later, Biomet filed a registration statement with the SEC for the planned IPO.
On March 9, Biomet’s bankers told the board that it was unlikely a third party would make a competing proposal and extensive telephone meetings were held over the next five days.
Board Sends Binder Back for $13.35 Billion
Finally, the Biomet board determined that an extended courtship with Zimmer and primping for an IPO would be too disruptive. They authorized Binder to make a “best and final” offer for $13.35 billion with $10.1 billion in cash (less Biomet’s net debt) and $3.25 billion in Zimmer stock.
On March 16, the two CEOs met. Binder told Dvorak that recent increases in valuation multiples of Biomet’s peers and optimism in their own strategy made Dvorak’s proposal of $12.75 billion too low. Binder said his board would consider a deal at $13.35 billion if Biomet would be treated as a public company and gets a couple of seats at the Zimmer board table. Dvorak said he thought the parties could do a deal “in a mutually satisfactory manner.” Then they discussed the logistics of a merger.
The next day the two companies’ bankers discussed the deal with each other.
Zimmer Moves in for the Kiss
Three days later, March 20, Zimmer’s board agreed to $13.35 billion, with $10.35 in cash and $3 billion in stock. Dvorak gave Binder the news on March 21.
Biomet: “No, No, Not Yet”
Biomet’s board replied the next day by sending Binder to tell Dvorak that while the board appreciated the effort, Zimmer would need to confirm it was willing to pursue a transaction “on the basis of certain key transaction terms Biomet had proposed in order for the board to authorize further discussions with Zimmer.”
The following day, March 23, Binder told Dvorak that no further discussions were authorized unless all the terms Biomet had proposed could be met. Later that same day, Biomet’s bankers contacted Zimmer’s bankers to discuss Binder and Dvorak’s conversation.
Zimmer Offers More
Dvorak called back the next day and told Binder that Zimmer would give in on the key terms. They then agreed to meet in-person meetings later in the week in order to discuss, among other things, the due diligence review process, the process for analyzing regulatory risk and the timeline and process for executing a definitive merger agreement.
Biomet Swoons, But…
On March 25, Biomet’s board authorized Binder to proceed with due diligence and to enter into exclusive negotiations with Zimmer. The two companies entered into a non-disclosure and exclusivity agreement that provided for an exclusivity period until April 30, 2014, but permitted Biomet to continue to pursue a potential initial public offering of Biomet common stock.
For the next ten days, meetings were held with the lawyers and bankers. The outside lawyers negotiated the terms of a joint defense agreement in connection with the regulatory risk analysis. On April 2, 2014, White & Case, Cleary Gottlieb and Weil Gotshal entered into a joint defense agreement.
Needs Assurances of Love
However, on April 6 Biomet’s outside lawyers reported that the proposed merger agreement “significantly departed” from the key transaction terms Biomet had proposed. The board then told Binder to terminate discussions with Zimmer until Binder was assured that the terms would be met. Binder gave Dvorak the news the following day.
Zimmer’s lawyers, at Dvorak’s direction, contacted Biomet’s lawyers later that day and confirmed that Zimmer was willing to meet all of Biomet’s terms, other than the request for board seats. Based on those assurances, Biomet’s board authorized Binder to re-commence negotiations.
While negotiations continued through April 24, Biomet’s board, just in case, continued preparations for the IPO. On April 10, Zimmer’s lawyers notified their counterparts that Zimmer was willing to give Biomet two board seats. Four days later Biomet filed an amended registration statement regarding a potential IPO with the SEC.
The Ring Exchange
On April 17, Biomet’s board finally met directly with Dvorak and other senior Zimmer managers, who gave them a presentation regarding Zimmer’s business and operations.
Six days later, on April 23, both boards approved the agreement. The agreement was executed on April 24 and a joint press release was issued before the financial markets opened.
Wedding Planned for 2015
The romancing is over but the marriage ceremony hasn’t yet taken place. The parties are awaiting the blessing the FTC (Federal Trade Commission) and European Union (EU) families. The EU promises to decide by early October. The FTC has made the dreaded second request for information.
However, the parents of the couple are confident of a ceremony in early 2015. It should be a good party down at the Warsaw VFW. We hope to get invited.
