ArthroCare acquired by Smith & Nephew: fairness opinion by Piper Sandler
Announced February 3, 2014 · One-step merger · All cash ·
DEFM14A filed April 3, 2014
Medical Devices and Supplies Medical Devices
Enterprise value
$1.5B
equity $1.7B
EV / LTM EBITDA
16.1x
EBITDA $96.0M · 24% margin
EV / LTM revenue
3.82x
revenue $405M
DCF discount rate
9.1%–11.1%
Exit multiple
Deal terms
ConsiderationAll cash
Price per share$48.25
Premium6.3%
Premium basisclosing price of $45.38 on January 31, 2014, last trading day prior to announcement
StructureOne-step merger
Termination fee$54.9M (3.2% of equity)
Reverse termination fee—
Go-shopNone
Outside date—
FilingDEFM14A · EDGAR index
Implied value per share by method vs. $48.25 offer
Selected companies — Orthopedics peers: EV / CY2013E revenue $36.39 – $36.69
Selected companies — Orthopedics peers: EV / CY2014E revenue $36.28 – $38.00
Selected companies — Orthopedics peers: EV / CY2013E EBITDA $34.78 – $36.13
Selected companies — Orthopedics peers: EV / CY2014E EBITDA $32.61 – $35.18
Selected companies — Orthopedics peers: P / CY2014E earnings $26.43 – $29.45
Selected companies — Med tech financial profile peers: EV / CY2013E revenue $42.55 – $45.79
Selected companies — Med tech financial profile peers: EV / CY2014E revenue $42.60 – $45.86
Selected companies — Med tech financial profile peers: EV / CY2013E EBITDA $41.81 – $43.08
Selected companies — Med tech financial profile peers: EV / CY2014E EBITDA $43.20 – $45.93
Selected companies — Med tech financial profile peers: Equity value / CY2014E earnings $37.02 – $37.80
Precedent transactions — Orthopedics M&A: EV / LTM revenue $40.23 – $44.16
Precedent transactions — Orthopedics M&A: EV / FTM revenue $39.73 – $49.69
Precedent transactions — Orthopedics M&A: EV / LTM EBITDA $41.04 – $41.49
Precedent transactions — Orthopedics M&A: EV / FTM EBITDA $38.82 – $39.48
Precedent transactions — Med tech M&A: EV / LTM revenue $49.60 – $51.96
Precedent transactions — Med tech M&A: EV / FTM revenue $47.17 – $50.21
Precedent transactions — Med tech M&A: EV / LTM EBITDA $44.12 – $45.89
Precedent transactions — Med tech M&A: EV / FTM EBITDA $42.45 – $44.58
Discounted cash flow $39.98 – $48.43
Historical Trading Analysis $31.67 – $48.00
Premiums Paid Analysis $50.25 – $59.30
Other Information—Company Analyst Price Targets $38.00 – $60.00
Ranges as disclosed in the banker’s summary of analyses; the red line marks the per-share consideration.
Opinion of Piper Sandler to the target board
Delivered February 2, 2014 · Fee $14.8M ($13.8M contingent on closing), $1.0M on delivery of the opinion
Discounted cash flow assumptions
Discount rate9.1%–11.1%
Basisestimated weighted average cost of capital of the Company
Terminal valueExit multiple
Perpetuity growth—
Exit multiple10.0x–12.0x projected 2018 EBITDA
Projection period2014E-2018E
Projections usedFinancial Forecasts provided by Company management (2013 Strategic Plan plus 2017-2018 forecasts)
Implied value per share$39.98–$48.43
Unlevered free cash flows from December 31, 2013 to December 31, 2018 discounted back to December 31, 2013; terminal value at December 31, 2018.
Selected public companies (19)
Alphatec Holdings, Inc. · CONMED Corporation · Exactech, Inc. · Globus Medical, Inc. · Integra LifeSciences Holdings Corporation · LDR Holding Corporation · NuVasive, Inc. · RTI Surgical, Inc. · Smith & Nephew plc · Stryker Corporation · Tornier N.V. · Wright Medical Group Inc. · Zimmer Holdings, Inc. · Cyberonics, Inc. · Edwards Lifesciences Corp. · Intuitive Surgical, Inc. · Masimo Corporation · Thoratec Corp. · Vascular Solutions, Inc.
| Multiple | Peer low | Peer median | Peer high | Range applied | Implied per share |
|---|---|---|---|---|---|
| Orthopedics peers: EV / CY2013E revenue | 1.2x | 2.9x | 5.5x | — | $36.39–$36.69 |
| Orthopedics peers: EV / CY2014E revenue | 0.9x | 2.9x | 4.8x | — | $36.28–$38.00 |
| Orthopedics peers: EV / CY2013E EBITDA | 8.2x | 11.5x | 18.4x | — | $34.78–$36.13 |
| Orthopedics peers: EV / CY2014E EBITDA | 7.5x | 10.1x | 16.3x | — | $32.61–$35.18 |
| Orthopedics peers: P / CY2014E earnings | 14.8x | 17.8x | 29.4x | — | $26.43–$29.45 |
| Med tech financial profile peers: EV / CY2013E revenue | 1.5x | 3.5x | 6.3x | — | $42.55–$45.79 |
| Med tech financial profile peers: EV / CY2014E revenue | 1.4x | 3.3x | 5.8x | — | $42.60–$45.86 |
| Med tech financial profile peers: EV / CY2013E EBITDA | 8.2x | 14.3x | 18.7x | — | $41.81–$43.08 |
| Med tech financial profile peers: EV / CY2014E EBITDA | 7.5x | 15.1x | 17.1x | — | $43.20–$45.93 |
| Med tech financial profile peers: Equity value / CY2014E earnings | 18.3x | 25.4x | 29.7x | — | $37.02–$37.80 |
Selected precedent transactions (23)
| Date | Target | Acquirer | Multiple |
|---|---|---|---|
| 2013-09-25 | MAKO Surgical Corp. | Stryker Corp. | — |
| 2013-06-19 | Wright Medical Technology, Inc. (OrthoRecon) | MicroPort Scientific Corporation | — |
| 2011-05-16 | Orthovita, Inc. | Stryker Corp. | — |
| 2011-04-27 | Synthes Holding AG | Johnson & Johnson | — |
| 2010-08-17 | Osteotech, Inc. | Medtronic, Inc. | — |
| 2008-09-04 | Abbott Spine, Inc. | Zimmer Holdings Inc. | — |
| 2007-07-27 | Kyphon, Inc. | Medtronic, Inc. | — |
| 2007-07-16 | DJO Opco Holdings, Inc. | ReAble Therapeutics, Inc. (Blackstone) | — |
| 2007-03-12 | Plus Orthopedics Holding AG | Smith & Nephew plc | — |
| 2006-12-18 | Biomet, Inc. | Investment Consortium | — |
| 2006-06-30 | Encore Medical Corporation | Blackstone Capital Partners | — |
| 2013-12-08 | Given Imaging LTD | Covidien plc | — |
| 2013-04-29 | Conceptus, Inc. | Bayer HealthCare LLC | — |
| 2012-05-03 | Kensey Nash Corp. | Royal DSM N.V. | — |
| 2011-04-11 | American Medical Systems, Inc. | Endo Pharmaceuticals Holdings, Inc. | — |
| 2010-10-18 | AGA Medical Holdings, Inc. | St. Jude Medical, Inc. | — |
| 2010-07-11 | Micrus Endovascular Corp. | Johnson & Johnson | — |
| 2010-06-16 | Somanetics Corp. | Covidien plc | — |
| 2009-09-28 | Aspect Medical Systems, Inc. | Covidien plc | — |
| 2008-12-01 | Mentor Corporation | Johnson & Johnson | — |
| 2008-09-16 | Datascope Corp. | Getinge AB | — |
| 2008-05-02 | ConvaTec (Bristol-Myers Squibb) | Avista Capital Partners and Nordic Capital | — |
| 2006-01-17 | Guidant Corp. (certain non-CRM assets) | Abbott Laboratories | — |
| Multiple | Low | Median | High | Range applied | Implied per share |
|---|---|---|---|---|---|
| Orthopedics M&A: EV / LTM revenue | 1.1x | 3.3x | 8.1x | — | $40.23–$44.16 |
| Orthopedics M&A: EV / FTM revenue | 1.1x | 3.0x | 11.0x | — | $39.73–$49.69 |
| Orthopedics M&A: EV / LTM EBITDA | 5.8x | 14.2x | 20.2x | — | $41.04–$41.49 |
| Orthopedics M&A: EV / FTM EBITDA | 11.0x | 12.4x | 14.8x | — | $38.82–$39.48 |
| Med tech M&A: EV / LTM revenue | 2.0x | 4.2x | 7.9x | — | $49.60–$51.96 |
| Med tech M&A: EV / FTM revenue | 1.8x | 3.7x | 6.9x | — | $47.17–$50.21 |
| Med tech M&A: EV / LTM EBITDA | 10.2x | 15.2x | 27.3x | — | $44.12–$45.89 |
| Med tech M&A: EV / FTM EBITDA | 9.5x | 13.8x | 28.8x | — | $42.45–$44.58 |
Other analyses
| Analysis | Summary | Implied per share |
|---|---|---|
| Historical Trading Analysis | Reviewed historical closing prices/volumes for the one-year period ended January 31, 2014: price on 1/31/2014 $45.38 (6.3% premium), 1-week prior $47.05 (2.6%), 4-weeks prior $39.73 (21.4%), average since DOJ settlement announcement $46.69 (3.3%), 1 day prior to DOJ settlement $40.58 (18.9%), 30-day avg $43.75 (10.3%), 60-day avg $40.18 (20.1%), 90-day avg $38.92 (24.0%), 180-day avg $36.83 (31.0%), one-year avg $36.31 (32.9%), one-year high $48.00 (0.5%), one-year low $31.67 (52.4%). | $31.67–$48.00 |
| Premiums Paid Analysis | 24 selected cash medical technology M&A transactions announced since January 1, 2006 with target EV > $500 million, North America based, 100% cash, >85% of shares. Premiums 1 day prior ranged 5%-86% (median 24%, mean 26%); 1 week prior 3%-78% (median 26%); 4 weeks prior 12%-107% (median 30%); premium to 52-week closing high (28)%-68% (median 14%). Implied per share values (mean-median): 1 day prior $50.25-$51.01; 1 day prior to DOJ settlement $56.20-$57.04; 1 week prior $58.93-$59.30; 4 weeks prior $51.54-$52.58; premium to 52-week closing high $54.96-$55.26. | $50.25–$59.30 |
| Other Information—Company Analyst Price Targets | Not relied upon in rendering the opinion. Wall Street analyst price targets as of January 6, 2014 ranged $38.00-$48.00 (average $44.17); as of January 31, 2014 ranged $43.00-$60.00 (average $51.17). | $38.00–$60.00 |
Total fee currently estimated at approximately $14.77 million, contingent upon consummation of the merger, except for $1 million earned for rendering the fairness opinion, which is creditable against the total fee and was not contingent on consummation or conclusions reached.
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Management projections
| Projection year | Year 1 | Year 2 | Year 3 | Year 4 | CAGR |
|---|---|---|---|---|---|
| Revenue | $441M | $488M | $522M | $559M | 8.2% |
| Revenue growth | 8.9% | 10.7% | 7.0% | 7.1% | |
| EBITDA | $117M | $139M | $146M | $157M | 10.3% |
| EBITDA growth | 21.9% | 18.8% | 5.0% | 7.5% | |
| EBITDA margin | 27% | 28% | 28% | 28% | |
| Implied EV / EBITDA | 13.2x | 11.1x | 10.6x | 9.8x |
Year-1 growth is against LTM at announcement ($405M revenue, $96.0M EBITDA); later years are year over year.
Management prepared the "Financial Forecasts" consisting of the 2013 Strategic Plan (FY2014-2016, updated for the board-approved 2014 budget) plus additional forecasts for FY2017 and FY2018 prepared in December 2013. Total revenue grows from $405 million in 2014 to $559 million in 2018, with Adjusted EBITDA of $96 million in 2014 rising to $157 million in 2018, net income of $53 million to $99 million, and unlevered free cash flow of $50 million in 2014 to $108 million in 2018. The Financial Forecasts were provided to Piper Jaffray for its valuation analysis and to the Board; Smith & Nephew received the forecasts other than fiscal 2017 and 2018.
Process notes
Single fairness opinion, from Piper Jaffray & Co. to ArthroCare's Board of Directors, dated February 2, 2014. Board formed a Transaction Committee; two directors were OEP designees and JP Morgan (an OEP affiliate) advised Smith & Nephew, raising conflict concerns — non-OEP directors unanimously agreed the OEP designees need not recuse. Voting agreements from OEP and all board members covering ~17.6% of outstanding shares. Smith & Nephew refused to participate in an auction; price escalated from $43.00 (Dec 10, 2013) to $45.50, then $46.00 (stated best and final), ultimately $48.25. A consolidated stockholder class action/derivative complaint was filed March 18, 2014 alleging breach of fiduciary duty and aiding and abetting by Smith & Nephew, OEP entities and J.P. Morgan. Merger consideration also reflects context of a $30 million DOJ settlement announced January 8, 2014. Termination fee of $54.9 million equals approximately 3.2% of equity value, implying equity value of roughly $1.7 billion.
Other Medical Devices and Supplies fairness opinions
- CareFusion / Becton Dickinson 2014 · 13.0x EV/EBITDA
- Covidien / Medtronic 2014 · 17.5x EV/EBITDA
- Symmetry Medical OEMS Business / Tecomet 2014 · 8.5x EV/EBITDA
- Medical Action Industries / Owens & Minor 2014 · 13.8x EV/EBITDA
- Sirona Dental Systems / DENTSPLY 2015 · 16.2x EV/EBITDA
- Liberator Medical Holdings / C. R. Bard 2015 · 11.5x EV/EBITDA
All Medical Devices and Supplies opinions → · Piper Sandler opinions