Steris to buy Synergy for $1.9B in another med tech tax inversion deal

Sterilization and infection prevention products and services company Steris ($STE) will acquire its more globally-focused peer Synergy Health in a cash and stock deal worth about $1.9 billion. The acquisition is expected to lower the combined company's fiscal tax rate to 25% in fiscal 2016 from the current 35%. Steris is based in Ohio, while Synergy is located in the U.K.

The pair expects the deal structure will avoid the tax inversion pitfalls that have befallen others; companies including the pharmacy chain Walgreens and biotech Salix Pharmaceuticals have called off planned tax inversion deals in recent months under increasing pressure from a U.S. political backlash against them.

The resulting company will be incorporated in the U.K., but have its operational and U.S. headquarters in Mentor, OH. It would have about $2.6 billion in annual revenues from more than 60 countries, with 14,000 employees. The companies said they have been in strategic talks for years. Steris also has gastrointestinal and surgical device businesses.

Synergy provides outsourced sterilization services to hospitals and medical device manufacturers, with about 80% of its earnings derived from these two businesses. It had $605 million in fiscal 2014 revenues, with almost 6,000 employees at 135 sites around the world.

For the last 5 years, it's been focused on strengthening its position in Europe and developing opportunities in Asia and the Americas. It provides sterilization services to one out of five hospitals in the U.K., with three-quarters of its revenues being ex-U.S., according to Synergy CEO Richard Steeves on a conference call about the deal. Synergy said earlier this year it expects annual revenue growth of 10% to 20% from its international expansion.

About 75% of Steris' fiscal 2015 annual revenues of about $1.9 billion were from the U.S.

The new company, also known as Steris, will improve its recurring revenue ratio to almost 75% of total revenues, from the current level of about 63%, Steris President and CEO Walt Rosebrough said on the call.

Beyond the strategic rationale, Steris will also see a tax benefit. Rosebrough said the companies believe the deal will not be hampered by the recently issued stricter guidelines for tax inversion deals and that they had used "a number of advisors" to assess the existing regulatory environment.

"We pay a 35% effective tax rate and we're dropping to 25%, which is fairly normal for international companies," he said. "It's not an unusually low tax rate in total, particularly when you assume the Synergy business which is largely outside the United States. So we're not taking super-aggressive postures, we are not using the number of techniques that the Treasury Department has described as things that they would naturally attack."

Synergy shareholders will receive £4.39 in cash and 0.4308 of a share in the newco for every Synergy share. Steris shareholders will own about 70% of the newco, while Synergy shareholders will have about 30%.

The deal values Synergy at a 39% premium to its Oct. 10 closing price. Rosebrough will be the President and CEO of the newco. The Steris board will expand to 13 from 10 and include three new directors including Synergy CEO Steeves.

The transaction is expected to result in total annual pre-tax savings of at least $30 million, with half of that in 2016 and all of it in subsequent years. This will be achieved through slimming back-office infrastructures, eliminating redundant public company costs and improving product acquisition and practices across plants.

Steris has obtained a credit agreement for $1.6 billion with Bank of America Merrill Lynch, J.P. Morgan and KeyBank to back-stop the deal, which is expected to close by March 31, 2015.

- here is the release
- and coverage from Bloomberg, Reuters, and The New York Times (sub. req.)

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