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J&J to buy Synthes for $21.6B

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Johnson & Johnson (JNJ-N) is to buy Swiss medical devices maker Synthes Inc. for 19 billion Swiss francs ($21.6 billion US) in its largest ever buy, boosting its orthopedic business and reshaping the industry.

The U.S. healthcare group will pay 159 Swiss francs in cash and stock for each Synthes share, the two companies said on Wednesday. That was a premium of 8.5 percent over Synthes's closing share price on Tuesday.

A deal had been anticipated after Synthes said on April 18 it was in talks with J&J.

The acquisition, which is likely to close in the first half of 2012, has the backing of both the Synthes and J&J boards and will give J&J a leading position in equipment to treat trauma.

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 deal 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.

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 is a key partner to Synthes, 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.

COUNTER BID UNLIKELY

Under the deal, each share of Synthes common stock will be exchanged for 55.65 francs in cash and 103.35 francs in J&J common stock, the groups said.

Synthes and J&J also said the transaction had an estimated net acquisition cost of $19.3 billion as of the close of business on April 26 based on Synthes approximately 119.5 million fully diluted shares outstanding and approximately $2 billion in cash on hand as of signing.

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.

"We do not expect a counter bid as we see J&J as the only logical industrial buyer," Vontobel analyst Carla Baenziger said.

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 3.28 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.

Cravath represented Johnson & Johnson in connection with this deal.

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