|Smith & Nephew CEO Olivier Bohuon|
Smith & Nephew's ($SNN) march toward diversification continues. The U.K. orthopedics giant agreed to fork over $1.7 billion for ArthroCare ($ARTC), a Texas device company that specializes in sports medicine joint repair and recently settled long-standing federal fraud charges in the U.S.
Smith & Nephew has struggled with a slump in its traditional orthopedic device product lines, due to pricing pressures and a decline in demand. In response, CEO Olivier Bohuon has focused on boosting S&N's wound care and sports medicine offerings in an effort to restore stronger revenue growth. The company's $48.25-per-share purchase of ArthroCare will help move that strategy forward. That's a 6.3% premium over ArthroCare's Jan. 31, 2014, closing share price, as The Wall Street Journal reported.
Bohuon told Bloomberg that the deal "rebalances Smith & Nephew in areas of higher growth."
Austin-based ArthroCare and Smith & Nephew also have a prior licensing and supply deal. Smith & Nephew suspended the remaining part of its $300 million share buyback program in the wake of its ArthroCare offer.
ArthroCare develops and makes surgical devices, instruments and implants focused on sports medicine, including joint treatments such as its Opus AutoCuff knotless fixation system. The company also builds products devoted to ear, nose and throat treatments, and has some focus on spine, wound care, urology and gynecology.
But sports medicine in particular drew Smith & Nephew's attention. The company already has a presence in the space through its Advanced Surgical Devices division, with product franchises targeted to sports medicine joint repair and arthroscopic enabling technology. In its deal announcement, S&N points out that its sports medicine joint repair arm has delivered reliably strong revenue growth.
ArthroCare is the latest strategic acquisition for Smith & Nephew in recent months. Last November, the company snatched up 25% of Politec Saúde, a Brazilian wound care operation. In 2012, Smith & Nephew grabbed wound care company Healthpoint Biotherapeutics for $782 million and has also acquired an Indian trauma business, among other deals.
Smith & Nephew's strategy shift has helped. The company reported nearly $1.03 million in revenue during its fiscal 2013 third quarter, a 5% hike over the previous year, thanks in large part to the Healthpoint purchase. Even knee and hip implants are doing better, despite continued challenges in Europe.
As for ArthroCare, the company agreed in January to pay a $30 million fine and enter a 24-month deferred prosecution agreement to resolve fraud charges tied to some of its former executives. Those ex-ArthroCare execs had been accused of falsely inflating the company's earnings and cheating investors out of more than $400 million over three years. ArthroCare already paid $74 million to settle class action lawsuits in the matter in 2011.
Smith & Nephew said it would finance the purchase through its existing debt facilities and cash balances.