After Flat Year, Zimmer Holdings Inc. (NYSE: ZMH) Stock Soars on Biomet Buyout

A flurry of billion-dollar healthcare and pharmaceutical deals have already been reported this week, and Thursday brought another big one.

Zimmer Holdings Inc. (NYSE: ZMH) announced today it will buy privately held Biomet Inc. in a cash and stock transaction valued at $13.35 billion. The deal, approved by both company boards and expected to close in Q1 of 2015, joins two top providers of orthopedic, surgical, and dental products.

zimmer nyse zmh stock 2014

Investors applauded the deal and sent Zimmer shares soaring nearly 20% intraday to a 52-week high of $108.33. An hour into trading, more than 4 million shares changed hands, about four times Zimmer's average daily volume. By noon, volume was up to 7.6 million shares.

With Wall Street showing its approval, Zimmer touted the tie-up.

"We believe that current demographics and macroeconomic trends affecting the health care industry will reward companies that successfully partner with other key stakeholders to improve patient care in a cost effective manner," said Zimmer Chief Executive Officer (CEO) David C. Dvorak in a statement. "Together with Biomet we will expand the scope of our innovation programs and will enhance our efforts to provide integrated services and comprehensive solutions that address the needs of our customers."

Biomet shareholders include private equity groups Blackstone, Goldman Sachs' buyout team, Kohlberg Kravis Roberts, and TPG Capital. The consortium took Biomet private in 2007 for $11.4 billion. They will receive $10.35 billion in cash, and stock worth $3 billion, giving them 16% ownership in the combined company.

And, it sounds like the companies will merge easily...

"Biomet and Zimmer share a 36-year history of mutual respect," Jeffrey R. Binder, Biomet's President and CEO, said in a statement. "Both companies are deeply rooted in the communities in which we operate and believe that we can only be successful in business if we are successful in helping health care providers improve the lives of patients."

The deal should also improve Zimmer's stock performance...

Zimmer (NYSE: ZMH) Gets Cost Savings and Growth

Shares of the Warsaw, Ind.-based company had been flat for the year prior to Thursday's deal. Facing an anemic U.S. market for reconstructive hip and knee products, as people postpone surgeries in a still sluggish and shaky economy, Zimmer struggled to find growth. Recent quarters, however, suggest declines are slowing.

With Biomet, Zimmer gets growth and a competitive edge.

"This will give Zimmer some leverage when they go to hospitals, and help them compete," said Bloomberg analyst Jason McGorman. Plus, he added, "they get a little more in terms of products in other areas, like sports medicine, extremities and trauma, where Zimmer has less exposure."

In addition to expanding Zimmer and Biomet's range of products and geographical reach, the deal positions the combined companies as key players in the lucrative and growing market for muscle and bone repair devices.

Indeed, over the next 15 years, aging baby boomers will turn 65 at a rate of about 8,000 a day. And, many will need new hips and knees. Some 719,000 total knee replacements and 332,000 total hip replacements are performed every year, according to the Centers for Disease Control and Prevention.

Knee and hip-related businesses will be Zimmer's two biggest operating units after the acquisition, contributing a projected 37% and 26% respectfully in revenue. The third-largest segment with be sports medicines, extremities, and trauma-related products, which are expected to kick in 15% to revenue.

According to Leerink Swann analyst Richard Newitter, the deal places Zimmer in a more secure peak position in the global hips and knee market, while landing it in the No. 2 spot in the overall orthopedic market.

The deal also ends a planned initial public offering by Biomet. Announced last month, Biomet aimed to raise some $100 million to pay off debt. Instead of an IPO, Biomet becomes a healthcare powerhouse and revenue generator.

Collectively, the two companies had revenue of roughly $7.8 billion in 2013. Zimmer projects cost savings of at least $270 million by the third year after the deal is done.

Zimmer (ZMH) stock was still simmering in afternoon trading. At last check, ZMH shares were up a healthy 12% at $103.

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