Thursday, January 17, 2013

Stryker to acquire Chinese Orthopedic Company - Trauson

Stryker Corporation  and Trauson Holdings Company Limited  announced today that Stryker will make a voluntary general offer to acquire all the shares of Trauson for HK$7.50 per ordinary share for a total consideration of $764 million in an all cash transaction, representing an enterprise value of approximately $685 million.  The acquisition gives Stryker a foothold in the Chinese market, where an ageing population and rising consumption in healthcare is driving demand for orthopedic products. Stryker and Trauson have maintained a relationship under an OEM agreement for instrumentation sets since 2007. With this acquisition, Stryker will expand its presence in a key emerging market with a product portfolio and pipeline that is targeted at the large and fast growing value segment of the Chinese orthopedic market.

Transaction Valuation - Stryker - Trauson

The deal value implies a 11.4 x trailing sales multiple.  Trauson generated $60 mil in 2011, up 32% year-over-year. For 1H12 Trausaon reported revenues of  $33 mil, up 28% year-over-year from the prior year period. Based on consensus revenue projections of $81 mil in 2012 and $94 mil in 2013, the proposed acquisition price implies an EV/Sales multiple of 8.5x and 7.3x on projected 2012 and 2013 sales, respectively.
On an EV/EBITDA basis, the transaction should be valuing Trauson at about 22x EV/EBITDA.

Transaction Rationale - Stryker - Trauson

Trauson is the largest producer of trauma products and one of the top three producers of spine products in China. Trauson controls ~5% of the $1B+ Chinese orthopedic market and largely sells into Tier II/III cities on the value-end of the pricing scale. Trauson’s broad portfolio (of more than 100 products) includes a second-generation intramedullary nail (used to align and stabilize long bone fractures), which is said to not only solve the distal aiming problem but also to make surgeries easier for the doctor. With an extensive distribution network (covering more than 30 provinces and other regions across China) and a number of already-established customers (more than 3,000 as of 2010), Trauson acquisition should offer Stryker an opportunity to broaden its presence in China and develop its emerging markets through a well-established brand.

By segment, trauma accounts for ~55% of Trauson revenue spine ~20%, and the balance of revenue comes from "OEM/"other" products 

Impact on Stryker Earnings

The closing of the transaction is subject to customary conditions. Upon closing, the transaction is expected to be neutral to Stryker's 2013 diluted net earnings per share excluding acquisition and integration-related charges and accretive thereafter. The transaction is expected to close by the end of the second quarter of 2013.