Medtronic to Acquire Kyphon for $3.9B, Expanding Spinal Business

Medical-devices maker Medtronic Inc. (MDT) said it agreed to acquire Kyphon Inc. (KYPH), a smaller rival, for $71 a share, or about $3.9 billion, in a move to expand its spinal business. The transaction, expected to close in first-quarter 2008, has been approved by the boards of both companies. The deal brings together two companies who have clashed in the past. Kyphon, Sunnyvale, Calif., with 2006 revenue of $407.8 million, makes medical devices for orthopedic applications using a technique called balloon kyphoplasty. In the minimally invasive, orthopedic treatment, a balloon is used to raise a collapsed vertebra to create a void for bone cement. The technique is used to treat compression fractures in the spine. Early last year, Medtronic filed a lawsuit against Kyphon, alleging the company infringed on at least four Medtronic patents related to balloon-dilation catheters and spinal treatment. Kyphon, meanwhile, has been pressured in the U.S. by a new spinal product rolled out in September by Medtronic. In releasing its fourth-quarter results, Kyphon said business in the U.S. was impacted by the “uncertainty and distraction created by Medtronic’s launch of its Arcuate XP product.” In a press release, the companies said their product lines and geographic presence are “highly complementary.” “While both companies have expertise in minimally invasive, highly effective treatments, Medtronic’s spinal surgery focus has been on providing treatment options for younger patients who are suffering from scoliosis and degenerative disc disease in the cervical and lumbar spine,” the companies said. Kyphon’s focus, meanwhile, has been on treating older patients suffering from vertebral compression fractures and spinal stenosis. The combined entity will be able to “serve patients with a broader variety of spinal disorders in order to alleviate pain and restore health for more patients,” the companies said. Metronic, with annual revenue of $12.3 billion, will also have a larger and expanded base of customers. Medtronic primarily serves orthopaedic and neurological surgeons who specialize in spinal surgery. Kyphon serves these same physicians and also has a significant customer base with interventional radiologists and interventional neuroradiologists. The purchase price excludes $320 million in payments associated with the St. Francis Medical Technologies Inc. and Disc-O-Tech Medical Technologies Ltd. transactions. Both companies agreed to be acquired by Kyphon in December. The pricetag represents a 32% premium over Kyphon’s closing Thursday stock price of $53.68, and a 35% premium over Kyphon’s 30-day average trading price of $52.76 per share. The transaction is expected to begin adding to Medtronic’s earnings after the first year. Minneapolis-based Medtronic expects the merger to yield “significant revenue, cost and tax synergies.” The transaction will be financed by a combination of cash on the balance sheet and debt. The news came as Kyphon said second-quarter earnings jumped 16% to $11 million, or 23 cents a share, from $9.48 million, or 21 cents a share, a year earlier. Net sales jumped 43% to $144.3 million from $101.1 million. Medtronic and Kyphon shares weren’t active in premarket trading. SOURCE: Money