04/27/2011 12:01 pm ET Updated Dec 06, 2017

Johnson & Johnson Buys Synthes For $21.6 Billion

ZURICH (By Katie Reid) - Johnson & Johnson is to buy Swiss medical devices maker Synthes Inc for 19 billion Swiss francs ($21.6 billion) in its largest ever buy, boosting its orthopedic business.

The U.S. healthcare group will pay 159 Swiss francs in cash and stock for each Synthes share, the two companies said on Wednesday, in a deal that will give J&J a leading position in equipment to treat trauma.
J&J's offer is a premium of 8.5 percent over Synthes's closing share price on Tuesday.

The acquisition, which is likely to close in the first half of 2012, has the backing of both the Synthes and J&J boards. A deal had been anticipated after Synthes said on April 18 it was in talks with J&J.

Synthes, which posted sales of $3.7 billion in 2010, makes nails, screws and plates to fix broken bones, as well as artificial spine discs.

"Orthopedics is a large and growing $37 billion global market and represents an important growth driver for Johnson & Johnson," said Bill Weldon, J&J's chairman and chief executive.

The deal is expected to have a modestly dilutive impact on J&J's adjusted earnings per share for 2012.
Crucially, the acquisition has the backing of Hansjoerg Wyss, who holds 40 percent of Synthes directly and another 8 percent through family trusts, and was seen as key to any deal going through. Synthes holds its annual general meeting on Thursday.

"It is surprising the deal has been struck between cash and shares. The market consensus, and our view, was it would be all cash, so the quality of the take-out is slightly lower than we anticipated," said Morgan Stanley analyst Michael Jungling.

"The take-out valuation doesn't seem particularly demanding. It's a scarce asset, and the acquisition makes J&J the number one in the world in Orthopedics," Jungling said.

At 1129 GMT, Synthes shares were trading 0.3 percent firmer at 147.00 francs, 12 francs below the price J&J is offering, reflecting the fact the deal is unlikely to close until next year, there could be anti-trust issues and the value of the deal could fall if J&J stock weakens.

Kepler Capital Markets analyst Florian Gaiser also said he felt the premium was not very high.

"The premium ... reflects the challenges to hand over Synthes to a new owner who needs to fully respect the Synthes culture and the tight relationship to the AO Foundation. These elements will limit the chances of the new owner to influence the business and exploit synergies," he said.

The AO Foundation, which works exclusively for Synthes in the areas of research and development, has said a deal would not initially result in any change and existing contractual obligations would have to be assumed by the new company.

The AO Foundation is a medically guided non-profit organization led by an international group of surgeons specialized in the treatment of trauma and disorders of the musculoskeletal system and is seen as giving Synthes a competitive advantage.


Under the deal, each share of Synthes common stock exchanged would be converted into 55.65 francs in cash, plus not more than 1.9672 and not fewer than 1.7098 shares of J&J common stock.

The medical device sector has been consolidating as companies seek economies of scale and new business areas, but analysts doubt anyone will want to take on J&J with a counter-bid for Synthes and J&J is seen as the only logical industrial buyer.

Matthew O'Brien, analyst at William Blair, said J&J may have to divest some trauma assets to get regulatory clearance for the deal, but he said it was unlikely the group would sell to rivals Stryker and Zimmer as it seeks to keep its dominant position.

"We believe that the new trauma entity could face antitrust opposition, as it will control over half of the worldwide market. The situation is difficult to predict as the business J&J is acquiring controls most of the market share," O'Brien said in a note.

Once the deal is completed, Synthes and the DePuy companies of J&J will together make up the largest business within the medical devices and diagnostics unit of J&J.

There had previously been speculation J&J, which had cash and short-term investments of $27.7 billion at the end of 2010, was interested in buying British Orthopedics company Smith & Nephew Plc.

Smith & Nephew shares were trading 3.2 percent lower on the news.
Medical devices and diagnostics accounted for 40 percent of J&J's $61.6 billion in 2010 sales, but the business has been hit by competition and recalls in its hip and knee replacement unit.

J&J owns around 250 separate companies under its corporate umbrella. The group attempted to buy U.S. medical device maker Guidant, which specialized in cardiovascular products, several years ago, but was outbid by Boston Scientific Corp.

Goldman Sachs advised J&J in connection with this deal, while Credit Suisse is advising Synthes.

(Additional reporting by Martin de Sa'Pinto in Zurich and Lewis Krauskopf in New York; Editing by Ben Hirschler and Hans Peters)
($1=.8800 Swiss Franc)

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