Colfax Corporation has announced that it agreed to buy Vista, CA-based orthopedic solutions provider, DJO Global Inc., in a $3.15-billion cash transaction. The other party to the transaction, the seller, is equity funds (private) managed by Blackstone Group.

DJO Global specializes in providing medical technologies related to the orthopedic field. Its products — including reconstructive implants, bracing, devices used in rehabilitation and software — as well as related services help in restoring natural movements of patients. Its key brands that are recognized globally include Dr. Comfort, DJO Surgical and Exos, among others.

DJO Global employees 5,000 people worldwide and has a vast customer base, ranging from patients and medical professionals to athletes. Sales generated in the 12 months, ended September 2018, were approximately $1.2 billion while earnings before interest, tax, depreciation and amortization (EBITDA) were roughly $269 million.

Details of Buyout

Per the definitive agreement signed, Colfax will fund this $3.15-billion buyout with $100 million in cash, and amounts raised through credit facilities and debts. Further, the company will raise roughly $500-$700 million from offerings of equity or equity-linked securities. Availability of bridge financing is also considered one of the financing options.

Upon the receipt of regulatory approvals and fulfillment of customary closing conditions, the buyout is anticipated to close in the first three months of 2019.

The buyout is in sync with Colfax’s efforts to diversify its business structure. The DJO Global acquisition will mark Colfax’s entry into the orthopedic solutions industry, which currently benefits from tailwinds like changing demographics and rising need for preventive healthcare, among others.

Upon completion, DJO Global’s assets will form a segment within Colfax. In the 12 months after the completion of the acquisition, Colfax anticipates earnings per share (adjusted) accretion from DJO Global. Moreover, it seeks to enjoy tax benefits from DJO Global’s $800-million operating loss carryforwards.

In addition to this, Colfax communicated that it prefers maintaining its current debt ratings and wishes to lower its debt burden in the near future. Net leverage ratio of the mid-3x range is targeted to be achieved in 2019. Moreover, the company intends to look for options for its Air and Gas Handling business. This business primarily deals with the manufacturing of turbines and compressors. This business is accounted for approximately 39.7% of total revenues generated in the first nine months of 2018.

Share Price Reaction

Colfax’s shares have lost nearly 15.2% yesterday, closing the trading session at $23.72. Exposure to a new platform, and search for options for air and gas handling business seem to have impacted market sentiments.

Zacks Rank & Key Picks

With a market capitalization of nearly $2.9 billion, Colfax currently carries a Zacks Rank #3 (Hold). The company stands to gain from healthy fabrication technology business, acquired assets, pricing actions and operational efficacy. However, inflation in material costs, unfavorable movements in foreign currencies and restructuring expenses might be detrimental to the company’s financials.

In the past 30 days, the company’s earnings estimates for 2018 have been increased by four brokerage firms and decreased by three. Further, estimates for 2019 were increased by seven firms and decreased by two. Currently, the Zacks Consensus Estimate for earnings per share remained unchanged at $2.25 for 2018 while grew 1.6% to $2.54 from the 30-day-ago tally.

Colfax Corporation Price and Consensus