In what ranks as one of the most surprising strategic moves since either Stryker’s purchase of Mako Surgical for $1.65 billion in 2013 or the 1988 merger of Danek with Sofamor, Montagu Private Equity LLP, the $6 billion European based private equity firm (formerly HSBC), signed a definitive agreement to purchase RTI Surgical Holdings, Inc.’s OEM (primarily tissue, biologic and hardware) business for $490 million.
The day before this transaction was announced, all of RTI, the entire company, was being priced by Wall Street’s traders at about $200 million.
On the conference call with investors and analysts, while RTI CEO Camille Farhat calmly described the transaction, the analysts, who were still trying to wrap their heads around the announcement, struggled to think of cogent questions to ask.
Had they looked into Camille Farhat’s history at GE, Baxter and American Medical Systems they might have seen clues as to what he is capable of accomplishing.
Why This Is the Ideal Transaction for RTI (also, Montagu)
RTI has long been in a difficult strategic box. The company’s origins are in the allograft business. RTI showed early growth momentum, expanding from allograft into xenograft and biologics. But tissue is not as profitable nor innovative as the spinal implant business. Therefore, under its previous CEO, Brian Hutchison, RTI acquired Pioneer Surgical and added spine hardware to its line of tissue and biologic products.
Unfortunately, the spinal implant market hit a deflationary cycle shortly after RTI bought Pioneer. Even today, the business of selling spinal implants remains a low growth, declining profit margin activity, in general (there are sectors that defy the overall industry profile). By 2015, RTI’s attempts at growth lacked successful execution. It had expanded into several specialty areas but lacked the scale and focus in any one area to effectively compete. The OEM [original equipment manufacturer] business was declining, and the spine business was lacking productive innovation.
Hutchison’s successor, Camille Farhat, recognized the business needed greater focus. He committed to returning OEM to growth and building up spine. Farhat was well-aware that growing spine by even a modest rate of 5% meant taking share from someone. Compounding that problem is the fact that RTI’s OEM business is highly dependent on other spinal implant suppliers most notably Medtronic Spine.
Any RTI initiatives in the spine hardware business could stimulate a reaction from its OEM customers.
As Farhat noted to OTW, “Growing spine is a delicate task.”
Farhat’s strategy, therefore, has been to seek out highly differentiated niche spine products which could deliver revenue growth and better than average gross profit margins and build scale to increase relevance among hospital and health system contracts. RTI’s spine business has tripled in size in the past five years moving into the top 10 of domestic spine companies. All while staying out of, for example, Medtronic’s way.
Separating RTI’s spine business from its OEM business, especially in exchange for $490 million, deftly opens up the entire range of spine technology to RTI.
Post transaction, RTI will have between $175 and $200 million cash in the bank and no debt.
Who Is the Buyer?
Montagu, the buyer of RTI’s OEM business is the former HSBC Private Equity firm. Based in London, this 52-year-old firm has about $6 billion under management and it has bought into more than 400 businesses. Its primary focus is on management buyouts of companies that operate in stable markets. Typically, Montagu looks for deals in the €100 million to €1 billion range. In RTI’s OEM business, Montagu found a business that offered differentiated products and unique design, R&D and manufacturing capabilities to such strong companies as Medtronic Spine and several other Blue Chip medical device companies that would otherwise be badly missed.
As Farhat noted on his call with analysts, under his watch, RTI’s OEM business has signed long-term stable supply contracts with 70% of its industry partners. Furthermore, OEM’s operating profit margins met Montagu’s internal return on investment criteria at, yes, the $490 million purchase price.
Boy, did Wall Street ever misprice RTI’s value!
