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Zimmer to Divest Assets to Meet Biomet Closing Conditions

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Zimmer Holdings, Inc. has finalized agreements necessary for the divestment of some of its assets, fulfilling an integral part of the closing conditions of the mega $13.4 billion Biomet deal.

According to the company, it has reached agreements to sell out certain of its Unicompartmental High-Flex Knee System assets, Biomet Discovery Elbow System assets and Cobalt bone cement assets in the U.S. The company is yet to receive a final approval from the U.S. Federal Trade Commission (FTC) on this merger and expects these divestments to facilitate the clearance.

Zimmer is currently working jointly with the Bureau of Competition Staff of FTC and is highly confident that within the next few weeks, it will successfully resolve FTC Staff's competitive concerns with regard to the proposed acquisition. Notably, the aforementioned divestiture agreements are still subject to further review by the FTC and acceptance of the Commissioners of the FTC’s consent order. 

Zimmer already has a go-ahead from the Japan Fair Trade Commission and a conditional approval from the European Commission (“EC”) on the proposed acquisition of Biomet. Taking into consideration the expected delay in obtaining the final clearance from the FTC as well as meeting other customary closing conditions, Zimmer extended the termination date of the deal in April, from Apr 24 to Jul 23, 2015. The company currently expects all the procedures to wrap up by mid-Jun 2015.

We are impressed with the strong strategic and financial goals that the combined entity expects to reach after the closure of the Biomet deal. Post-acquisition, the combined entity – to be named “Zimmer Biomet” – seeks to become a market leader in the $45 billion musculoskeletal industry, backed by a more comprehensive and diversified portfolio with 17% market share and attractive cross-selling opportunities.

Zimmer expects enormous financial benefits from this takeover. According to the company, upon completion, the transaction is expected to be accretive to its adjusted earnings per share in double digits in the first year. Moreover, by the third year, net annual synergies should reach approximately $270 million with roughly $135 million expected in the first year itself.

The combined entity is also likely to generate operating cash flow of more than 1.5 times Zimmer's stand-alone estimates. Accordingly, with strong cash flow, Zimmer should be able to maintain a stable dividend of 15% to 20% of net income following the closure of the deal. Full-year 2015 guidance for the combined company will be provided post completion of the transaction.

The stock currently carries a Zacks Rank #3 (Hold).

Stock to Consider

Some better-ranked medical products stocks are Bio-Rad Laboratories, Inc. (BIO - Free Report) , Hospira Inc. and Vascular Solutions Inc. . All the three stocks sport a Zacks Rank #1 (Strong Buy).

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