Shadow is Cast Over Buyout of Biomet

The buyout of medical-device maker Biomet Inc. was thrown into doubt last night as shareholder-advisory service Institutional Shareholder Services recommended Biomet holders vote down a $10.9 billion private-equity deal for the company.

The recommendation, made prior to a June 8 shareholder vote on the deal, was a rebuke for a group of private-equity heavyweights who had assembled to buy the maker of artificial knees, hips and other orthotic devices. That group consists of Blackstone Group, Goldman Sachs’ private-equity arm, Kohlberg Kravis Roberts & Co., and TPG Capital.

As an Indiana-incorporated company, Biomet’s buyers must meet a high standard to get final approval for the deal: Winning support from at least 75% of all shares outstanding.

That makes the buyout groups particularly vulnerable to a small group of shareholders who might want to extract better terms from the private-equity groups.

Such situations have begun to crop up frequently, with shareholders wresting sweeter prices in the purchase of Clear Channel Communications Inc. and OSI Restaurant Partners Inc.

Of course, the ISS report doesn’t guarantee that shareholders will vote down the current deal. And there is significant risk in doing so, given that share prices typically drop after a transaction is rebuffed.

Still, the report highlights the growing frictions between shareholders and buyout firms, who are engaged in a historic buying binge across nearly every sector of the stock market.

Aggrieved Biomet shareholders will be able to reference the ISS report, which says that the company’s takeover valuation hasn’t kept up with significant gains notched by those of peers since December. The report notes, for instance, that the company’s price-to-earnings ratio for next year’s earnings stood at 22.6 times, compared with a median price-to-earnings ratio of 28.9 times for a select group of peer companies.

“Although the deal terms appear fair as of the time of the deal’s announcement in December, the rally of the peer group” and its main joint reconstruction business “imply that there is little takeover premium in the current $44 offer price,” the ISS reports notes.

Yesterday, Biomet shares were down 10 cents to $43.60 in 4 p.m. Nasdaq composite trading.

A Biomet spokesman didn’t immediately return a request for comment, nor did representatives for the buyout group.

SOURCE: THE WALL STREET JOURNAL