Big deal

J&J to buy Synthes for $21.6bn

Johnson & Johnson is buying Synthes Inc, the Swiss maker of screws and plates to fix broken bones, for 19 billion Swiss francs ($21.67bn), boosting its orthopedic business in a major realignment of the medical device sector.

The U.S. healthcare group will pay 159 Swiss francs in cash and stock for each Synthes share in a deal moving past a tide of consumer product recalls and loss of patent protection for key pharmaceutical products.

J&J's biggest ever acquisition is at a premium of 21.7% over Synthes's closing share price of 130.60 Swiss francs on April 14. This was before takeover talk boosted the Swiss group's share price.

The acquisition, which is expected to close in the first half of 2012 but could be sealed earlier, is backed by both boards. Synthes said on April 18 it was in talks with J&J.

Synthes, which also makes artificial spine discs and has benefited from aging populations, posted sales of $3.7bn in 2010.

"Orthopedics is a large and growing $37bn 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.

Many analysts had expected a buy would instead lift profits next year thanks to synergies and this disappointment weighed on J&J's stock.

J&J executives said there was little overlap between the two companies and there would be few job cuts.

Crucially, the acquisition has the backing of Hansjoerg Wyss, who holds 40% of Synthes directly and another 8 percent through family trusts.

Cash and stock

Under the deal, each Synthes share will be exchanged for 55.65 Swiss francs ($63.48) in cash, with the remaining 65% of the deal being paid for in J&J stock.

Shareholders will get up to 1.9672 J&J shares for each Synthes share, but the ultimate value of the deal could fluctuate depending on J&J's share price and the exchange rate of the dollar versus the franc.

"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 1503 GMT, Synthes shares were trading near flat at 146.40 francs, 12.60 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. J&J stock traded 0.8% weaker at $64.42.

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.

J&J will preserve Synthes's ties with the AO Foundation, a nonprofit Swiss group whose technology and surgeon training have been a key part of the company's success.

Counter bid unlikely

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.

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.

J&J said it did not believe it would need to divest products to clear antitrust hurdles.

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

Smith & Nephew shares were trading 2% lower on the news.

Medical devices and diagnostics accounted for 40% of J&J's $61.6bn in 2010 sales, but the business has been hit by competition and recalls in its hip and knee replacement unit.

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

(Published by Reuters - April 27, 2011)

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