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S&N Pays $1.5B For Sports Medicine Specialist ArthroCare

NEW YORK (The Deal) -- The U.K.'s Smith & Nephew hopes to get a leg up in the fast-growing sports medicine sector through the $1.5 billion acquisition of Nasdaq-listed ArthroCare (ARTC) which counts One Equity Partners LLC as its largest shareholder.

The London-based buyer said Monday it agreed to offer $48.25 a share in cash for Austin, Texas-based ArthroCare. The offer price is price is 6.3% above the target's closing share price Friday on Nasdaq, and the $1.5 billion enterprise value, which is net of roughly $200 million of cash, represents a multiple of 15.7 times adjusted 2012 Ebitda, according to Smith & Nephew.

Smith & Nephew shares added 1.4% in London Monday morning to trade at 888 pence, for a total market value of about £2.92 billion ($4.77 billion). Smith and Nephew is looking to the acquisition to bolster its offerings in noninvasive sports medicine.

"This is a great deal that rebalances Smith & Nephew in areas of higher growth," said Smith & Nephew CEO Olivier Bohuon on a conference call.

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Through the purchase, the U.K. company will gain ArthroCare's patented Coblation technology for gently dissolving injured tissue and minimizing damage to surrounding healthy tissues, as well as ArthroCare's range of solutions for joints, in particular the shoulder, including its so-called Opus-AutoCuff knotless implants. The buyer said it sees additional growth opportunities through ArthroCare's related ear, nose and throat business.

The buyer said it will use an existing $1 billion revolving credit facility, and a new two-year $1.4 billion term loan facility from Barclays plc and JPMorgan Chase & Co. to help finance the purchase. It is suspending a $300 million share buyback program, having already bought back $226 million of stock.

By the end of 2014, Smith & Nephew said it expects net debt to fall below 1.5 times Ebitda. Smith & Nephew had net debt of $222 million at the end of its third quarter.

ArthroCare had net sales $368 million in 2012, earnings of $64 million and total assets of $520 million. Revenue for the first three quarters of 2013 came to $276 million, 2% above the previous year. ArthroCare employs about 1,800 people, including a 400-strong salesforce, and has its main manufacturing sites in Costa Rica and a research and development facility in Irvine, Calif.

Sports medicine accounted for more than two-thirds of ArthroCare's 2012 revenue, with 30% from ear, nose and throat and 3% from other activities.

Monday's announcement comes about three weeks after ArthroCare signed a so-called deferred prosecution agreement with the U.S. Department of Justice concerning allegations of securities fraud by the company's former management.

Smith & Nephew said it expects to add about $85 million to its annual profit as a result of the acquisition in the third full year after completing the purchase.

Smith & Nephew employs more than 11,000 people and had more than $4.1 billion in 2012 sales.

One Equity Partners, which has preferred shares equivalent to 17% of ArthroCare's equity, has said it will tender its stock. The target's board also backs the transaction.

For advice on the deal, Smith & Nephew turned to JPMorgan, Centerview Partners Holdings LP and Davis Polk & Wardwell LLP.

ArthroCare enlisted Piper Jaffray & Co., Goldman, Sachs & Co. and Latham & Watkins LLP.

The U.K.'s Smith & Nephew plc hopes to get a leg up in the fast-growing sports medicine sector through the $1.5 billion acquisition of Nasdaq-listed ArthroCare Corp., which counts One Equity Partners LLC as its largest shareholder.

The London-based buyer said Monday it agreed to offer $48.25 a share in cash for Austin, Texas-based ArthroCare. The offer price is price is 6.3% above the target's closing share price Friday on Nasdaq, and the $1.5 billion enterprise value, which is net of roughly $200 million of cash, represents a multiple of 15.7 times adjusted 2012 Ebitda, according to Smith & Nephew.

Smith & Nephew shares added 1.4% in London Monday morning to trade at 888 pence, for a total market value of about £2.92 billion ($4.77 billion). Smith and Nephew is looking to the acquisition to bolster its offerings in noninvasive sports medicine.

"This is a great deal that rebalances Smith & Nephew in areas of higher growth," said Smith & Nephew CEO Olivier Bohuon on a conference call.

Through the purchase, the U.K. company will gain ArthroCare's patented Coblation technology for gently dissolving injured tissue and minimizing damage to surrounding healthy tissues, as well as ArthroCare's range of solutions for joints, in particular the shoulder, including its so-called Opus-AutoCuff knotless implants. The buyer said it sees additional growth opportunities through ArthroCare's related ear, nose and throat business.

The buyer said it will use an existing $1 billion revolving credit facility, and a new two-year $1.4 billion term loan facility from Barclays plc and JPMorgan Chase & Co. to help finance the purchase. It is suspending a $300 million share buyback program, having already bought back $226 million of stock.

By the end of 2014, Smith & Nephew said it expects net debt to fall below 1.5 times Ebitda. Smith & Nephew had net debt of $222 million at the end of its third quarter.

ArthroCare had net sales $368 million in 2012, earnings of $64 million and total assets of $520 million. Revenue for the first three quarters of 2013 came to $276 million, 2% above the previous year. ArthroCare employs about 1,800 people, including a 400-strong salesforce, and has its main manufacturing sites in Costa Rica and a research and development facility in Irvine, Calif.

Sports medicine accounted for more than two-thirds of ArthroCare's 2012 revenue, with 30% from ear, nose and throat and 3% from other activities.

Monday's announcement comes about three weeks after ArthroCare signed a so-called deferred prosecution agreement with the U.S. Department of Justice concerning allegations of securities fraud by the company's former management.

Smith & Nephew said it expects to add about $85 million to its annual profit as a result of the acquisition in the third full year after completing the purchase.

Smith & Nephew employs more than 11,000 people and had more than $4.1 billion in 2012 sales.

One Equity Partners, which has preferred shares equivalent to 17% of ArthroCare's equity, has said it will tender its stock. The target's board also backs the transaction.

For advice on the deal, Smith & Nephew turned to JPMorgan, Centerview Partners Holdings LP and Davis Polk & Wardwell LLP.

ArthroCare enlisted Piper Jaffray & Co., Goldman, Sachs & Co. and Latham & Watkins LLP.

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