Updated from 6:15 a.m. Investors with a bone to pick with Biomet's plan to go private got what they wanted Thursday. Some shareholders felt that Biomet was worth more now that it was when the company attracted an $11 billion buyout offer following an industry downturn last year. They were due to vote Friday on a deal that would have paid them $44 a share -- a figure criticized by some as insufficient. So on Thursday, Blackstone Group, Goldman Sachs Capital Partners, Kohlberg Kravis Roberts & Co. and TPG agreed to up the ante, boosting their bid for the orthopedic device maker to $46 a share. "We believe the proposed price for the transaction is fair to Biomet's shareholders," said Chairman Niles Noblitt. "We also believe that the investor group's tender offer will deliver superior value to Biomet's shareholders in a more efficient and more immediate fashion than the process provided by the original merger agreement. Moreover, this revised offer provides greater certainty and visibility to completion of the transaction." The move heads off a nasty battle that was developing ahead of Friday's shareholder vote, now canceled. Under state law in Biomet's home base of Indiana, a minority of shareholders -- just over 25% -- can block the transaction by voting against it. What's more, Institutional Shareholder Services, the influential proxy advisory firm, had urged shareholders to do just that. In a report published last week, ISS noted that Biomet has rallied along with the rest of the group due to a rebound in the joint reconstruction industry. While Biomet now fetches a little more than its $44-a-share buyout price, rivals such as Zimmer ( ZMH) and Smith & Nephew ( SNN) are trading near their 52-week highs as well. ISS believes that Biomet could be worth as much as $65 a share and that shareholders should step forward and demand their proper due. "The board has tied its own hands," ISS explains. "It cannot recommend shareholders vote against the deal absent a superior offer. ... As such, the 'material beneficial change' inherent in the peer-group rally can only be captured if Biomet shareholders vote down the current offer."
At least one major investor -- New York-based P. Schoenfeld Asset Management -- has already laid out plans to oppose the deal, The New York Times reported this week. Still, even critics of the buyout recognize that Biomet faces serious challenges. While Biomet's core reconstruction business has fared well along with the rest of the group, the company's EBI spine division has been struggling for years. But some fear that Biomet could be selling itself -- too cheaply -- just as EBI recovery efforts start to pay off. ISS points to Biomet's own financial outlook as evidence of better times ahead. "While the management projections might seem aggressive in comparison to the current Street estimates and recent actual estimates, a turnaround of the EBI business might meaningfully shrink the gap," ISS says. "In addition, we note that the management team was confident enough in these projections to present them to the board, and the board has included them in the proxy statement, making it difficult to believe the numbers are mere flights of fancy." Yet Biomet has revealed a new EBI-related problem. Notably, the company disclosed last month that it has fielded a federal subpoena seeking information about its EBI unit. That probe comes even as the company tries to put other investigations -- including one focused on its stock option grants -- behind it.
HealthPoint Capital, an industry trade publication, expressed some concern. "Just as Biomet is resolving the issue of backdating options," HealthPoint Capital noted last week, "it seems that a new obstacle may have emerged." Meanwhile, Biomet still faces possible penalties resulting from a sweeping probe of the industry. For two years, the Justice Department has been investigating possible kickbacks offered by Biomet and other joint makers that could improperly sway physicians and boost company sales. The companies have denied any wrongdoing. However, The Star-Ledger of New Jersey reported last month, they could be poised to pay hefty fines nonetheless. By now, the newspaper stated, federal investigators have gathered statements from "prominent doctors around the country who allegedly accepted lavish vacations, gifts and 'consulting fees' as high as $200,000 a year from the implant makers for little or no work." Thus, the newspaper indicated, some looming penalties could be on the way. "Now in its final stages, the investigation could end as soon as this summer," The Star-Ledger wrote, "with a settlement of hundreds of millions of dollars, a pledge by the industry to reform and the installation of a federal monitor." Biomet fully plans to sell itself in the meantime. And Wachovia analyst Michael Matson, for one, seems to think that the current price looks reasonable. "We are not sure how ISS defined its peer group," Matson wrote last week. But "our analysis shows that
the deal is at a 10% to 18% premium to peers and at the high end of prior ortho deals as well."
Matson has a market-perform rating on Biomet's stock, which he values at $40 to $48 a share. His firm makes a market in Biomet's stock and hopes to secure investment banking business from the company. Ultimately, Matson feels that Biomet's takeout price falls "at the lower end of acceptability." Still, he estimates that the company might command just a couple of dollars a share more even if the deal were announced today. But ISS, pushing investors to reject company wishes and take the matter into their own hands, clearly expects better. "We find these types of board recommendation provisions to be questionable in that they commit the board to recommend an action that may not be in the current best interests of shareholders -- which, in our opinion, does not square well with a board's fiduciary duties," ISS states. "When a board ties its own hands in this way, it renders its recommendation less instructive and as such is more easily disregarded by shareholders." Thus, ISS concludes, "we recommend that shareholders who are willing to risk the 'bird-in-the-hand' offer for likely short-term downside in return for long-term value vote against the transaction."