Osteotech acquired by Medtronic: fairness opinion by Deutsche Bank
Announced August 17, 2010 · One-step merger · All cash ·
DEFM14A filed October 13, 2010
Medical Devices and Supplies Advanced Materials
Enterprise value
$123M
equity $123M
EV / LTM EBITDA
11.8x
EBITDA $10.4M · 11% margin
EV / LTM revenue
1.26x
revenue $97.6M
DCF discount rate
14.0%–19.0%
Perpetuity growth and exit multiple
Deal terms
ConsiderationAll cash
Price per share$6.50
Premium—
Premium basis—
StructureOne-step merger
Termination fee$5.0M
Reverse termination fee—
Go-shopNone
Outside dateAugust 16, 2011
FilingDEFM14A · EDGAR index
Implied value per share by method vs. $6.50 offer
Selected companies — EV / 2010E Revenue (applied to Osteotech, whole company) $5.08 – $7.57
Selected companies — EV / 2011E Revenue (applied to Osteotech, whole company) $5.95 – $8.53
Selected companies — EV / 2010E EBITDA (applied to Osteotech, whole company) $4.34 – $6.49
Selected companies — EV / 2011E EBITDA (applied to Osteotech, whole company) $4.88 – $6.94
Precedent transactions — TEV / NTM EBITDA $5.98 – $9.22
Discounted cash flow $5.53 – $8.07
Analysis of Selected Publicly Traded Companies — sum of the parts $5.21 – $7.75
Fifty-Two Week Trading Range $2.55 – $4.99
Ranges as disclosed in the banker’s summary of analyses; the red line marks the per-share consideration.
Opinion of Deutsche Bank to the target board
Delivered August 16, 2010 · Fee $1.5M ($1.5M contingent on closing), $0.8M on delivery of the opinion
Discounted cash flow assumptions
Discount rate14.0%–19.0%
BasisEstimated WACC by business segment: 14.0%-16.0% for Legacy business; 17.0%-19.0% for Next Generation business
Terminal valuePerpetuity growth and exit multiple
Perpetuity growth-1.0%–1.0%
Exit multiple2.0x–3.0x TEV / LTM Revenue (Next Generation business)
Projection period2H2010E-2012E
Projections usedOsteotech management forecast (by segment: Legacy and Next Generation)
Implied value per share$5.53–$8.07
Sum-of-the-parts DCF: Legacy business terminal value via perpetuity growth of (1.0%) to 1.0%; Next Generation business terminal value via 2.0x-3.0x TEV/LTM Revenue.
Selected public companies (8)
Orthovita, Inc. · RTI Biologics, Inc. · CONMED Corporation · AngioDynamics, Inc. · Kensey Nash Corporation · CryoLife, Inc. · Synovis Life Technologies, Inc. · LeMaitre Vascular, Inc.
| Multiple | Peer low | Peer median | Peer high | Range applied | Implied per share |
|---|---|---|---|---|---|
| EV / 2010E Revenue (med tech - implants; orthopedic/spine) | 0.8x | 1.1x | 1.5x | — | — |
| EV / 2011E Revenue (med tech - implants; orthopedic/spine) | 0.7x | 1.0x | 1.3x | — | — |
| EV / 2010E EBITDA (med tech - implants; orthopedic/spine) | 6.9x | 13.4x | 19.9x | — | — |
| EV / 2011E EBITDA (med tech - implants; orthopedic/spine) | 4.7x | 8.0x | 11.4x | — | — |
| EV / 2010E Revenue (med tech - diversified surgical products) | 1.0x | 1.4x | 2.2x | — | — |
| EV / 2011E Revenue (med tech - diversified surgical products) | 0.9x | 1.3x | 2.2x | — | — |
| EV / 2010E EBITDA (med tech - diversified surgical products) | 4.5x | 7.4x | 10.0x | — | — |
| EV / 2011E EBITDA (med tech - diversified surgical products) | 4.3x | 6.6x | 7.8x | — | — |
| EV / 2010E Revenue (applied to Osteotech, whole company) | — | — | — | 1.0x–1.5x | $5.08–$7.57 |
| EV / 2011E Revenue (applied to Osteotech, whole company) | — | — | — | 0.9x–1.3x | $5.95–$8.53 |
| EV / 2010E EBITDA (applied to Osteotech, whole company) | — | — | — | 8.0x–12.0x | $4.34–$6.49 |
| EV / 2011E EBITDA (applied to Osteotech, whole company) | — | — | — | 7.0x–10.0x | $4.88–$6.94 |
| EV / 2010E Revenue - Legacy business (sum-of-the-parts) | — | — | — | 0.5x–0.7x | — |
| EV / 2011E EBITDA - Legacy business (sum-of-the-parts) | — | — | — | 6.0x–9.0x | — |
| EV / 2011E Revenue - Next Generation business (sum-of-the-parts) | — | — | — | 1.5x–2.5x | — |
| EV / 2011E EBITDA - Next Generation business (sum-of-the-parts) | — | — | — | 9.0x–13.0x | — |
Selected precedent transactions (6)
| Date | Target | Acquirer | Multiple |
|---|---|---|---|
| 2010-05 | Biosphere Medical, Inc. | Merit Medical Systems, Inc. | — |
| 2010-05 | HealthTronics, Inc. | Endo Pharmaceuticals Holdings Inc. | — |
| 2010-02 | Home Diagnostics, Inc. | Nipro Corporation | — |
| 2009-09 | Aspect Medical Systems, Inc. | Covidien Public Limited Company | — |
| 2008-02 | Possis Medical, Inc. | MEDRAD, Inc. / Bayer HealthCare | — |
| 2008-01 | Lifecore Biomedical, Inc. | Warburg Pincus LLC | — |
| Multiple | Low | Median | High | Range applied | Implied per share |
|---|---|---|---|---|---|
| TEV / NTM EBITDA | 7.6x | 10.7x | 23.5x | 9.0x–14.0x | $5.98–$9.22 |
Other analyses
| Analysis | Summary | Implied per share |
|---|---|---|
| Analysis of Selected Publicly Traded Companies — sum of the parts | Applied segment-specific reference ranges (Legacy: 0.5x-0.7x 2010E Revenue and 6.0x-9.0x 2011E EBITDA; Next Generation: 1.5x-2.5x 2011E Revenue and 9.0x-13.0x 2011E EBITDA) and summed the implied enterprise values. | $5.21–$7.75 |
| Fifty-Two Week Trading Range | Reviewed historical closing prices for Osteotech common stock during the 12-month period ended August 13, 2010, which ranged from $2.55 to $4.99. | $2.55–$4.99 |
Transaction fee of approximately $1.5 million contingent on consummation; $0.8 million opinion fee payable on delivery of the fairness opinion, which reduces the transaction fee. Expense reimbursement and indemnification also provided. DB Group received approximately $13 million from Medtronic affiliates for financial services in the prior two years.
3,000+ healthcare deal-level valuation multiples
The Valuation database includes financial details for more than 3,000 healthcare M&A transactions, private and public, with deal-level multiples, categorized by segment, type, and year.
Management projections
| Projection year | Year 1 | Year 2 | CAGR |
|---|---|---|---|
| Revenue | $127M | $155M | 22.0% |
| Revenue growth | 30.4% | 22.0% | |
| EBITDA | $13.4M | $21.5M | 60.4% |
| EBITDA growth | 28.8% | 60.4% | |
| EBITDA margin | 11% | 14% | |
| Implied EV / EBITDA | 9.2x | 5.7x |
Year-1 growth is against LTM at announcement ($97.6M revenue, $10.4M EBITDA); later years are year over year.
Deutsche Bank used Osteotech management's forecasts, including segment-level forecasts for the Legacy business (Grafton DBM, Xpanse, traditional tissues and spinal allografts) and the Next Generation business (MagniFuse, Plexur M, FacetLinx). The DCF used projected free cash flow for the second half of 2010 and the years 2011 through 2012. Specific revenue and EBITDA dollar figures were not disclosed in the summarized sections.
Process notes
Single fairness opinion from Deutsche Bank Securities Inc. to the Osteotech board, delivered orally and confirmed in writing on August 16, 2010. Competitive process: a second bidder ("Party A") competed, offering up to the high end of its range (approx. $6.80/share) but refused to fully guarantee its acquisition shell's obligations, ultimately offering a $50 million reverse termination fee and later lowering its indication to $5.50/share; the board determined Medtronic's $6.50/share proposal was superior. Merger consideration subject to downward adjustment if share/option/RSU counts or third-party expenses ($4,868,400 cap) exceed specified thresholds. Target expense reimbursement to Medtronic of up to $3.0 million, offset against the $5.0 million termination fee. DB Group had received ~$13 million from Medtronic affiliates for financial services in the prior two years.
Other Medical Devices and Supplies fairness opinions
- Micrus Endovascular / Johnson & Johnson 2010 · 23.1x EV/EBITDA
- Somanetics / Covidien 2010 · 20.5x EV/EBITDA
- ev3 / Covidien 2010 · 27.9x EV/EBITDA
- Synthes / Johnson & Johnson 2011 · 9.6x EV/EBITDA
- SonoSite / FUJIFILM Holdings 2011 · 21.1x EV/EBITDA
- Synovis Life Technologies / Baxter International 2011 · 17.1x EV/EBITDA
All Medical Devices and Supplies opinions → · Deutsche Bank opinions