Profit Alert: ArthroCare (Nasdaq: ARTC) Stock Outshines Broad Market, Climbing 8%

While the Dow Jones Industrial Average fell 326 points today, U.S. medical device maker ArthroCare Corp. (Nasdaq: ARTC) handed investors an 8.24% gain...

That's because British medical technology company Smith & Nephew PLC will buy ArthroCare in a $1.7 billion all-cash deal, a move aimed at tackling the growing sports medicine industry.

Smith & Nephew announced Monday it will pay $48.25 for each share of Austin, Texas-based ArthroCare, a roughly 6% premium to its closing price of $45.38 on Friday.

The British company believes ArthroCare's shoulder joint repair expertise will nicely complement its knee and hip repair segment and generate "significant additional revenue."

"We wanted to acquire in high-growth businesses and sports medicine is definitely one of them," Smith & Nephew Chief Executive Officer Olivier Bohuon said in a statement.

Indeed, the lucrative sports medicine device market is expected to reach $5.7 billion by 2017, a 9.3% increase from 2011, according to MarketsandMarkets, a Texas-based global reach and consulting company. Reasons cited include an increase in the number of professional and nonprofessional players and the growing popularity of team and individual sports.

Revenue at the British firm's sports medicine business has been growing at 7%, while its hip and knee replacement segment is growing by 5%. Smith & Nephew expects the deal will add approximately $85 million to annual trading profit in the third full year as a combined entity.

ArthroCare, which makes surgical devices, instruments, and implants, also sports an ENT (ear, nose, and throat) franchise that can be developed outside the United States, Bohuon added.

Some 68% of ArthroCare sales come from America, while Smith & Nephew generates most of its revenue in Europe and emerging markets. Selling products to a more global market should be "a relatively straightforward exercise," Jones added.

"The acquisition of ArthoCare makes clear strategic sense; it makes the company a leader in sports medicine and expands its reach into the ENT market, thereby improving its long-term growth prospects," Mike Cooper, an analyst at Edison Investment Research, told Reuters.

And the gains could keep going for ARTC investors...

Bigger Bid for ArthroCare (ARTC) Could Be On the Way

Smith & Nephew is paying a mild premium of 20% above ArthoCare average trading price over the last three months. That has led to some speculation a higher offer could still come.

With net sales of $368 million, and earnings of $94.6 million in 2012, the purchase values ArthroCare at a modest 15.7 times adjusted 2012 earnings. Total revenue for the first three quarters of 2013 was a healthy $276 million, a 2% increase over the same period a year earlier. Q4 earnings are scheduled for Feb. 13.

Shares are up 13% year to date, in an overall market that's down 5%.

Moreover, ArthroCare's cutting-edge radio-frequency technology, which gives surgeons additional options and is a less risky and intrusive surgical choice, could be worth much more.

The company's innovative technology, called coblation, uses high-frequency energy and natural saline to dissolve targeted tissue while preserving healthy tissues. Its coblation products are widely used in minimally invasive orthopedic surgeries on shoulders, knees, and hips. It's also used in procedures involving the ear, nose, and throat.

There are a couple of issues to note with ArthroCare...

On Jan. 7, the company agreed to pay a $30 million fine to resolve a U.S. Department of Justice (DOJ) investigation, first made public in December 2008, into alleged securities fraud by its former management.

The government has also charged ArthroCare with one count of conspiracy to commit securities fraud and wire fraud. But, in a two-year deferred prosecution agreement, the DOJ won't bring charges against ArthroCare if the company meets requirements outlined by the DOJ. The matter will then be closed.

ArthroCare (ARTC) stock closed up 8.24% Monday to $49.12.

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