Medtech industry giant Smith & Nephew (FTSE:SN, NYSE:SNN) may see rivals attempt to steal away its $1.7 billion deal for sports medicine company ArthroCare (NSDQ:ARTC), which has become a more attractive target since Smith & Nephew’s original offer.
ARTC shares have gained about 9% since announcing the mega-offer from Smith & Nephew, which agreed to buy ArthroCare for $48.25 per share. ARTC opened at $49.50 today, and analysts have speculated that the stock’s sudden rise may draw other offers to the table.
"There are a lot of reasons why a bigger company would want this," J.P Morgan analyst David Turkaly told Bloomberg. "Could somebody pay more than $1.7 billion for ArthroCare? I think the answer could be yes."
ARTC shares were flat in the early afternoon, opening at $49.50 and trading at $49.54 as of about 12:10 p.m. The stock has gained 23.1% since the start of the year. SNN shares were up 2.2% to $73.37 as of about 11:30 a.m., having gained 2.3% since this year.
With the new gains, ARTC shares are at a $45.70 20-day stock price average, bumping Smith & Nephew’s offer down to a premium of just 5.6%. That’s the lowest premium since the 1990s for a medtech offer greater than $500 million, Bloomberg reported.
ArthroCare has an attractive portfolio of sports medicine technologies and minimally invasive surgical systems, and the recent settlement of a Dept. of Justice fraud case prompted speculation that the company was ripe for a buyout. Industry titans such as Johnson & Johnson (NYSE:JNJ) and Stryker (NYSE:SYK) are among the most likely to get into the game and attempt to out-bid Smith & Nephew, J.P. Morgan and other analysts told Bloomberg.
Smith & Nephew early this month announced that had made a $1.7 billion offer for ArthroCare, a price-tag that, at the time, represented a premium of about 6.3% on ARTC shares. With the recent surge in ARTC value, Smith & Nephew’s offer represents an ever-smaller premium over the company’s value.
An acquisition became more feasible for ArthroCare early this year, when it agreed to pay $30 million to settle a $400 million fraud case with the U.S. Justice Dept. The Jan. 7 deal put to rest a years-long probe into an alleged scheme designed to generate false revenue numbers to meet internal and external forecasts by dumping inventory, first with a distributor called DiscoCare and eventually via free shipments to end-users.
Smith & Nephew said it expects the ArthroCare buyout to add roughly $85 million to its annual trading profit after integration, slated to be complete in about 3 years. The merger is projected to cost about $100 million over 3 years, according to a press release. The British healthcare conglomerate said it plans to finance the deal by tapping a $1 billion credit revolver and a new, $1.4 billion term loan. Smith & Nephew said it’s halting its $300 million share buyback program after repurchasing some $226 million worth of its own stock.