Texas-based TPG Capital, formerly Texas Pacific Group, has made a bid to buy Gainesville, Florida-based supplier of large joint and extremity recon products Exactech, Inc. for $625 million.
The transaction, which was announced on October 23, is expected to close in early 2018.
The price that TPG is offering is 31% higher than Exactech’s public stock price at the time of the offer.
Jeff Binder, former CEO of Biomet, and Dan Hann, former interim President and CEO of Biomet advised TPG on the acquisition. According to a press release from Exactech, both former Biomet CEOs will be working with TPG Capital “to further realize Exactech’s exciting potential.”
Bill Petty’s Exactech
William Petty, M.D., co-founder and longtime CEO of Exactech, literally wrote the book on total joint replacement.
Its title was “Total Joint Replacement” and it was published in 1991—six years after he, his wife Betty and Dr. Gary Miller founded Exactech in 1985.
Dr. Petty is a former orthopedic surgeon and professor of orthopedics. He’d earned his B.S., M.S., and M.D. degrees from the University of Arkansas.
His residency was in Orthopaedic Surgery at the Mayo Clinic in Rochester, Minnesota, during a time when Mark Coventry was department head. Dr. Coventry performed the first total hip replacement operation in the U.S. in 1969 using methyl methacrylate. Coventry is also credited for developing one of the most comprehensive databases on joint replacements in the world. The Mayo Clinic Joint Replacement Database is a treasure trove of information that contains details of every knee, hip, shoulder, wrist, ankle, finger and elbow procedure since Coventry’s first arthroplasty back in 1969.
As a member of Coventry’s department, Petty was immersed in one of the great research, science and evidence based medical decision making medical centers in the world. The Mayo experiences served Dr. Petty well and are in evidence in the way he and his co-founders designed Exactech.
Following his residency, Dr. Petty and his wife moved to Naples, Florida, where he practiced orthopedic medicine for about a year. Dr. Petty then joined the medical faculty at the University of Florida at Gainesville.
It was at the University that Dr. Petty met Gary Miller Ph.D. associate professor of orthopedic surgery and director of research and biomechanics. Together, the two doctors began helping companies like Johnson & Johnson and Howmedica design and improve their large joint reconstruction products.
In the mid-1980s, Dr. Petty and Dr. Miller designed an innovative new cemented hip implant at Bill and Betty Petty’s kitchen table.
That implant was brand named: Cemented Hip.
Marketing and branding were not key features of Exactech in those early days.
Exactech’s second product was MCS press fit porous stem. Like Cemented Hip, this was an elegantly designed implant which shifted loads around to minimize hip pain.
For the first few years Exactech was 100% a hip reconstruction company.
By 1991, sales had grown to $2.1 million. And the company was profitable.
In 1996, Dr. Petty decided to take the company public and sold 1.6 million shares, raising about $13 million. Sales that year were $13.8 million.
By the end of this current year, according to a consensus of Wall Street analysts, Exactech sales should reach $269 million.
The following chart illustrates Exactech’s revenue growth from 1991 to 2017. In total, the company has grown at an average annual compound rate of 4.75%.
In addition to serving as CEO of Exactech, Dr. Petty has also been a Professor at the University of Florida College of Medicine, Chairman of the Department of Orthopaedic Surgery at the University of Florida College of Medicine, member of the Hospital Board of Shands Hospital, Gainesville, Florida, examiner for the American Board of Orthopaedic Surgery, member of the Orthopaedic Residency Review Committee of the American Medical Association, member of the Editorial Board of the Journal of Bone and Joint Surgery, and member of the Executive Board of the American Academy of Orthopaedic Surgeons. Finally Dr. Petty holds the Kappa Delta Award for Outstanding Research from the American Academy of Orthopaedic Surgeons.
Exactech’s Buyer, TPG Capital
If, as expected, the sale closes Exactech will join 61 other companies in the TPG Capital healthcare portfolio. The only other orthopedic company in that portfolio is Biomet, which was acquired by Zimmer in 2014.
TPG was founded in 1992—seven years after Exactech was incorporated—by David Bonderman, James Coulter and William S. Price, III. Since inception, TPG, formerly known as Texas Pacific Group, has raised more than $50 billion of investor commitments across more than 18 private equity funds. With the appreciation of many of its investments, the total amount of capital under management is $75 billion.
When it was founded, Texas Pacific Group was a leveraged buyout style investor. The first major transaction Bonderman and Coulter did was the 1993 buyout of Continental Airlines. At the time, the two founders of TPG were virtually alone in their conviction that there was hidden value in that. Bonderman and Coulter brought in a new management team, improved aircraft utilization and focused on lucrative routes. By 1998, their five year old investment firm was generating an annual internal rate of return of 55% on its investment.
Many big deals followed. But the culture and reputation of TPG Capital changed. Today it is known as a low-key, management friendly, long term investor in companies. One of its more surprising deals was its investments in two of Silicon Valley’s biggest recent hits—Survey Monkey and Uber.
TPG also won a bidding war for the massive health care data company IMS Health (now QuintilesIMS). It won, in large measure, because of its reputation for building businesses, not dismantling them.
A New Chapter Begins for Exactech
Exactech’s board of directors has recommended that its shareholders accept this bid to purchase the company. Dr. and Mrs. Petty and CEO David Petty have agreed to vote all of their shares in favor of the merger and to exchange a significant portion of their shares for new shares in the parent entity immediately following the merger. If our math is correct, the Petty Family should realize roughly $140 million from this sale.
When the deal is completed, Exactech will be a privately held company headquartered in Gainesville, Florida.
Jim Binch, Exactech’s lead independent director said in a press announcement regarding the deal: “We believe that this agreement offers Exactech shareholders an opportunity to realize the company’s tremendous growth and capture the value that’s been created since going public 21 years ago, at a significant premium to the current share price.”
Exactech CEO David Petty, son of co-founders Bill and Betty Petty, added, “This agreement provides maximum value for our shareholders, who have shared our vision and supported our growth over the past two decades.”
Todd Sisitsky, Managing Partner at TPG Capital, said: “As long-term healthcare investors, we aim to identify and partner with strong companies that are in growing, attractive sectors. With their strong commitment to patients and surgeons and a comprehensive product portfolio, Exactech has strategically built a platform poised for significant growth. We are thrilled to partner with CEO David Petty, the company founders, the Exactech management team and TPG Capital advisors Jeff Binder and Dan Hann to further realize Exactech’s exciting potential.”
Finally, former Biomet CEO and TPG advisor, Jeff Binder said: “The basis of our investment thesis is that there are outstanding opportunities for nimble, innovative and responsive companies to invest in growth and compete with the larger competitors in the orthopaedic industry. I look forward to working with management to fully realize the potential of a company for which I have always had great respect.”
