Smith & Nephew’s ArthroCare Bid Could be Threatened

Bloomberg has reported that Smith & Nephew plc’s $1.7 billion acquisition of ArthroCare Corp. might be at risk of counter offers. Being the lowest premium for a medical instruments company since the 1990s, Smith & Nephew’s bid is allowing Stryker Corp. and Johnson & Johnson an opportunity for a rival offer.

ArthroCare, based in Austin, Texas, makes products used in arthroscopic surgery on shoulders and knees. Sports medicine typically involves minimally invasive soft-tissue surgery from sports or work-related injuries. Arthrocare specializes in soft-tissue surgery. It makes devices, instruments and implants that improve surgical procedures, including a radio-frequency technology that, according to the company, dissolves soft tissue with less damage than traditional heat-driven processes. Smith & Nephew will also gain technology used in tonsil removal is this purchase is successful.

“There are a lot of reasons why a bigger company would want this,” David Turkaly, a New York-based analyst at JMP Group Inc., told Bloomberg. “Could somebody pay more than $1.7 billion for ArthroCare? I think the answer could be yes.”

The deal came together after an agreement with the U.S. Department of Justice last month boosted the stock and prompted takeover speculation. The gains mean that Smith & Nephew is offering only 5.6 percent more than ArthroCare’s average price in the prior 20 days, according to data compiled by Bloomberg. JMP Group Inc. estimated that Arthrocare could get about $55 a share in a sale because of its high-margin assets in sports medicine and the chance to expand international sales.

JMP analysts also said that Zimmer Holdings Inc. a $16 billion maker of orthopedic and dental reconstruction implants, could be interested in ArthroCare. In addition to gaining high-margin assets, acquirers with a more global presence may see an opportunity to expand ArthroCare’s international sales, which make up about a third of its annual revenue, Turkaly said.

Stryker, JNJ and Zimmer have remained mum on the issue, even after being asked for comment by Bloomberg.