Note – I do not own stock in Stryker or Wright. Send your thoughts confidentially here – email@example.com
PLEASE ANSWER four questions about the acquisition from an analyst – firstname.lastname@example.org
Analyst – We have heard that the combined WMGI-SYK would have quite a few metatarso-phalangeal (“MTP”) plates, including the Maxlock and Mini Maxlock (WMGI products, from OrthoHelix acquisition), Ortholoc (WMGI), Variax and Variax 2 (SYK product offerings), Anchorage (SYK, from MMI acquisition), Darco (WMGI), and Charlotte (WMGI).
There is a limitation on divestitures in the merger contract of products up to $25mm in annual revenue (in addition to Total Ankle Replacement which the parties have already agreed to sell given the concentration in ankle replacement.) We’re getting a sense from our work that there may be another area of competition that regulators may focus on within the “MTP” plates offerings that both companies have.
Question 1) Are the plates mentioned above substitutable for one another? (in the context of how we look at these, are they the same market/application?), or will the combined company just have a lot of MTP plates for different purposes?
Question 2) It is our understanding that the combined WMGI/SYK would have a large presence (perhaps 50%+ market share), in these indication specific reconstruction plates. Would you agree?
Question 3) If you agree on the 50% plus market share estimate, do you think regulators would be ok with 1 company controlling half the market in this area? From our work, we don’t think the market is prepared for regulators to come and ask for this part of the business to be broken up. (for background, the market consensus view seems to point to hammer toe, or finger joint replacement offering being sold off)
Question 4) If something needed to be sold to reduce market concentration, which product line would a combined WMGI-SYK be most willing to part ways with? We think they might be asked to part ways with the plating business, and we’re trying to get some perspective on how important that business is to SYK’s future plans.
Sep2019 – Stryker and Wright board approvals
Nov2019 – Acquisition announced
Jan2020 – Wright shareholder sues to block acquisition
1Q2020 – S+N may try to outbid Stryker.
June 4, 2020 – Stryker to close financing for the acquisition
June 30, 2020 – new deadline of Stryker tender offer to buy shares
1H 2020 – Hart-Scott-Rodino Antitrust Approval
2H 2020 – Divestiture of some assets
Nov 4, 2020 – new Closing date due to COVID
Thanksgiving 2020 – First consolidations and layoffs at Wright
I noticed a stock dip recently with Wright (WMGI) which is unusual with an agreed upon price by a strong acquirer. Got me thinking… amid the COVID-19 pandemic, would Stryker actually back out of the acquisition (with a $500M penalty) and acquire Wright at a later date for half the price?
Smith and Nephew may try to outbid Stryker in early 2020. S+N had bid $29 per share before Stryker’s bid of $30.75 per share, but the CEO transition upset the acquisition. I give S+N a small chance of outbidding Stryker before closing, but we will see.
Stryker’s motives – The crown jewel for Stryker acquisition may very well be the Tornier part of Wright which is #1 in upper extremities. Stryker is weak in upper extremities. Don’t forget that Wright recently acquired Tornier for a whopping $3.3B. Then Stryker paid only $2B more for the combination of Wright + Tornier… 5 years later.
Stryker timing – Quick stock history. Because of timing, Stryker got a lower priced deal. Wright’s stock had dropped 20% in 2Q2019 after a research report by RBC Capital Markets analysts showing issues with Cartiva outcomes. Wright had paid $435M for Cartiva in Oct 2018, but Wright’s foot & ankle surgeons could not achieve the same clinical results found in the Cartiva clinical series.
Stryker’s organizational chart will matter – Stryker reports its extremities business under its trauma division. It will be very telling to see if Stryker creates a new “Extremities division” or continues to “tuck” extremities underneach trauma based in Mahwah NJ at the Stryker Orthopedics headquarters.
Stryker will devour Wright – Stryker is the BEST in orthopedics at assimilating acquisitions into their businesses. Stryker will quickly integrate Wright into to the Stryker culture. Stryker bought Wright for Wright’s products and customers. Stryker did not buy the Wright employees.
Stryker’s will become the clear new #1 in the extremities market.
The deal will probably likely pass the Hart-Scott-Rodino anti-trust test, but since Wright is #2 and Stryker is #3 in US foot/ankle, Stryker will have to divest its STAR ankle business. Wright already has a 70% share in the total ankle replacement market. I believe that since the STAR ankle has some recent new safety notice issues this will be an easy decision to sell. A buyer of STAR Total Ankle may get a great bargain.
Wright’s lower extremity and biologics business is based in Memphis. Many of the 700 Memphis employees may be in the balance (450 employees at the corporate headquarters in Memphis and 250 employees at manufacturing and distribution center in Arlington). Wright’s upper extremity business (the original Tornier business) has about 150 employees in Bloomington MN and about 50 employees in Warsaw IN .
Wright has a specialized direct sales force for extremities and biologics that will be quickly dissected and integrated into the Stryker sales machine after closing in 2020.
This bold move by Stryker may prompt Zimmer-Biomet and DePuy-Synthes to acquire other extremities properties soon in order to stay competitive in extremities.
Even prior to Stryker revealing itself as the buyer, some Wall Street analysts flagged the fact that the two companies’ overlapping ankle businesses could present antitrust concerns.
At the time of the deal, analysts at Jefferies estimated that Stryker and Wright Medical together have up to 45% of the lower extremity market, with Stryker’s STAR total ankle replacements a $20 million to $30 million product.
Another area of similarity, shoulders, is limited by Stryker’s market share, the Jefferies analysts said Nov. 4. “Collectively, anti-trust divestitures could total $50-60mn in sales,” the analysts wrote.
Recent Securities and Exchange Commission filings indicated as many as five other companies were interested in a deal with Wright Medical aside from Stryker. In December, media reports indicated Smith & Nephew was interested in filing a higher bid for Wright Medical than Stryker.
Prior to the newly posted second request, analysts at Jefferies wrote Dec. 23, 2019, that “a higher bid seems like a low probability event.”
“In terms of the possibility of a bid from SNN, while we believe there is a strong strategic rationale for a transaction, as it would move the company’s growth profile higher, the financial aspects of a deal at a price in the $34-$35 range would lead to significant dilution and/or leverage (depending on the deal structure) and a ROIC that doesn’t reach 8% by 2025,” they wrote.
Stryker and Wright Medical both did not respond to questions in time for publication.
- In by far its largest acquisition announced this year, Stryker plans to integrate Wright Medical into its orthopaedics business for $30.75 per share, representing a total equity value of about $4 billion, or $5.4 billion including convertible notes.
- CEO Kevin Lobo told investors Monday that Stryker had been looking at Wright Medical “for a long time,” with hopes the deal will bolster Stryker’s position in the fast-growing trauma and extremities markets.
- The deal is expected to close in the second half of 2020 and will not affect 2019 or 2020 full-year earnings, management said. Some analysts expect the combined foot and ankle business to draw antitrust concerns from regulators.
Stryker is set to integrate a company that lost more than 20% of its stock value since its second quarter earnings report in August. Investor uncertainty appeared to stem from disruptive sales force attrition in Wright’s lower extremities business coupled with declining sales of its synthetic cartilage treatment for arthritic toes, which it acquired in its $435 million deal for Cartiva last year.
Still, Stifel analysts said Monday that Stryker’s offer “makes sense for all parties involved” and called Wright’s offerings “arguably the broadest and deepest global extremities portfolio,” noting surgical repair of upper and lower extremities are among the fastest growing medtech end markets. In its presentation to investors following the announcement, Stryker pegged a collective 8% compound annual growth rate for the upper extremities, lower extremities and extremity biologic segments in orthopaedics where Wright plays.
Wright Medical is expected to generate $900 million in revenues this year. Stryker said it assumes cost savingsof up to $125 million in the first three years after closing.
The announcement Monday morning put an end to weekend speculation stoked by a Bloomberg report saying Wright Medical was exploring a sale. Analysts had pegged Medtronic, Smith & Nephew and Johnson & Johnson as other possible buyers. Executives declined to comment on whether Wright’s sale was a competitive process.
Needham analyst Mike Matson, writing before the deal broke, pegged Smith & Nephew as the most logical acquirer and noted potential antitrust issues in the foot and ankle sectors with a Stryker-Wright union.
RBC Capital Markets analysts shared those foot and ankle antitrust concerns, expecting the combined company to give Stryker “the clear #1 market share position” in that market, ahead of Johnson & Johnson, and require it to unload its STAR total ankle replacement business.
And RBC was skeptical of the deal’s merits.
“We are surprised by the WMGI deal and believe that SYK had better uses of cash,” analysts wrote, also noting a slower-than-expected integration of K2M brings up “questions on whether SYK can integrate the WMGI business without unexpected surprises.”
Stryker’s Katherine Owen, vice president of investor relations, confirmed to analysts on a conference call the anticipated closure in the third quarter of next year factors in expected Federal Trade Commission review. Owen said it is premature to comment on potential divestitures or products that may be discontinued as a result of the combination.
Stryker appears most bullish about how Wright could bolster its upper extremities business in particular, citing its highly specialized sales force, CEO Kevin Lobo indicated on the call with investors. Lobo said Stryker had “been looking at Wright Medical for a long time.”
Lobo said Stryker has not been as strong in upper extremities with its shoulder products only sold in the U.S. The path to “category leadership” was not as fast without adding Wright, Lobo said. Those comments follow Lobo noting last week that Stryker’s shoulder business lacks “much of a dedicated sales force.”
Interest in that market stems in part from a tripling in the annual number of shoulder arthroplasty procedures during the last decade “due to favorable demographics, expanding indications, and improved outcomes,” Stryker said in its presentation.
Spine and shoulder remain the next two expansion targets for the Mako robotic surgery platform, Lobo said.
The deal dwarfs many of Stryker’s other significant acquisitions, including the $1.4 billion takeout of K2M in 2018 and the $1.65 billion purchase of Mako Surgical in 2013. Stryker management said the deal is being financed through available cash and new debt. In the near-term, Lobo said Stryker still has the capacity to do some tuck-in acquisitions.
Shares in Wright Medical were up about 30% Monday, while Stryker’s stock was down more than 4%.
Wright Medical is set to present third quarter earnings Wednesday, Nov. 6.
Purchase Price of $30.75 Per Share in Cash; Total Enterprise Value of Approximately $5.4 Billion and Total Equity Value of Approximately $4.7 Billion
Proposed Acquisition Brings Together Highly Complementary Product Portfolios and Customer Base
Wright Medical Group N.V. WMGI, +5.82% today announced that it has entered into a definitive agreement under which Stryker SYK, -1.62% will acquire all of the issued and outstanding ordinary shares of Wright Medical Group N.V. for a total equity value of approximately $4.7 billion, including the value of Wright’s outstanding convertible notes, and total enterprise value of approximately $5.4 billion.
Under the terms of the agreement, Stryker will commence a tender offer for all outstanding ordinary shares of Wright for $30.75 per share, in cash. The boards of directors of both Stryker and Wright have approved the transaction. The closing of the transaction is subject to receipt of applicable regulatory approvals, the adoption of certain resolutions relating to the transaction at an extraordinary general meeting of Wright’s shareholders, completion of the tender offer and other customary closing conditions. The offer of $30.75 per share in cash represents a premium of 52% over the volume-weighted average closing price of Wright ordinary shares over the thirty calendar days ended October 31, 2019, the last trading day prior to speculation that Wright was exploring a sale of the company. The acquisition is expected to close in the second half of 2020.
Robert Palmisano, president and chief executive officer of Wright, said, “We believe this transaction will provide truly unique opportunities and will create significant value for our shareholders, customers and employees. By merging our complementary strengths and collective resources, we will be able to advance our broad platform of extremities and biologics technologies with one of the world’s leading medical technology companies that shares our vision of delivering breakthrough and innovative solutions to improve patient outcomes. In addition, our employees will be afforded the opportunity to be part of one of the world’s best workplaces with greater depth of resources for sustained success in our industry. We look forward to working with Stryker to complete the transaction. Our board of directors believes this acquisition is in the best interests of our shareholders, employees and other stakeholders and has unanimously voted to recommend that Wright shareholders vote in favor of it.”
Kevin Lobo, chairman and chief executive officer of Stryker, said, “This acquisition enhances our global market position in trauma & extremities, providing significant opportunities to advance innovation, improve outcomes and reach more patients. Wright has built a successful business and we look forward to welcoming their team to Stryker.”
Wright brings a highly complementary product portfolio and customer base to Stryker’s trauma and extremities business. With global sales approaching $1 billion, Wright is a recognized leader in the upper extremities (shoulder, elbow, wrist and hand), lower extremities (foot and ankle) and biologics markets, which are among the fastest growing segments in orthopaedics.
Wright’s leading upper extremity portfolio and advanced preoperative planning technology will significantly add to Stryker’s offering. Additionally, Wright’s lower extremity and biologics will complement Stryker’s portfolio and strengthen the company’s position in this high-growth segment.
For further information regarding certain terms and conditions contained in the definitive purchase agreement, please see Wright Medical’s Current Report on Form 8-K, which will be filed in connection with this transaction.
An investor presentation is available at www.wright.com in the “Investor Relations” section.
Wright Medical Third Quarter 2019 Results
Wright Medical plans to file its third quarter 2019 Form 10-Q with the U.S. Securities and Exchange Commission prior to the filing deadline, which is November 8, 2019. Due to the pending transaction with Stryker, Wright will no longer issue a press release for its third quarter 2019 results, and Wright’s quarterly conference call, previously scheduled for Wednesday, November 6, 2019, has been cancelled. In connection with this announcement, the company is also suspending its 2019 annual financial guidance.
In connection with the transaction, Guggenheim Securities is serving as lead financial advisor and J.P. Morgan Securities LLC is acting as financial advisor to Wright Medical. Ropes & Gray LLP is serving as legal counsel to Wright Medical.
Internet Posting of Information
Wright routinely posts information that may be important to investors in the “Investor Relations” section of its website at www.wright.com. The company encourages investors and potential investors to consult the Wright website regularly for important information about Wright.
About Wright Medical Group N.V.
Wright Medical Group N.V. is a global medical device company focused on extremities and biologics products. The company is committed to delivering innovative, value-added solutions improving quality of life for patients worldwide and is a recognized leader of surgical solutions for the upper extremity (shoulder, elbow, wrist and hand), lower extremity (foot and ankle) and biologics markets, three of the fastest growing segments in orthopedics. For more information about Wright, visit www.wright.com.