Cantel Medical Corp., a provider of instrument reprocessing and infection prevention products and services, today announced that it has entered into a definitive agreement to acquire privately-held Hu-Friedy Mfg. Co., a 111-year-old global manufacturer of instruments and instrument reprocessing workflow systems serving the dental industry. This combination creates a provider of comprehensive infection prevention, instrument and instrument management solutions to optimize dental practitioners' need for superior clinical performance and best-in-class infection prevention practices. Cantel is acquiring Hu-Friedy for $725 million in upfront cash and stock consideration, and up to $50 million in earnout payments payable in cash and stock conditional on the achievement of commercial milestones in the first eighteen months after closing. The transaction structure is anticipated to result in tax benefits to Cantel presently valued at more than $100 million, which would result in a net purchase price of $625 million for the upfront consideration and up to approximately $675 million in consideration including potential earnout payments.
 
The company will hold a conference call to discuss the acquisition today at 8:30 a.m. Eastern Time. Call-in details are included below.
 
Combining Hu-Friedy's leading position in dental instrumentation and instrument management systems with Cantel's leading dental infection prevention consumables meaningfully accelerates Cantel's strategy to be the leading global provider of innovative infection prevention and reprocessing workflow solutions and education across its key end markets. During the twelve-month period ended May 31, 2019, Hu-Friedy generated approximately $214 million in revenue, and adjusted EBITDA of approximately $48 million.
 
"The combination of our two dental businesses provides a clear and immediate opportunity to become the leading provider of a 'Complete Circle of Protection' offering for instrument reprocessing workflow and infection prevention and compliance solutions in the dental industry," said George Fotiades, president and chief executive officer of Cantel. "By bringing together our highly complementary dental portfolios, we will create a business that is uniquely positioned to address the most critical workflow needs of our customers while improving patient care. Hu-Friedy brings us the scale, commercial capabilities and portfolio breadth to enable our dental business to be a significant driver of long-term profitable growth for Cantel." 
 
"We are excited to join forces with Cantel and are looking forward to the opportunities this combination will bring for our customers, employees and other stakeholders," said Ron Saslow, chairman and chief executive officer of Hu-Friedy. "As a leader in dental instrumentation and instrument management solutions, Hu-Friedy's combination with the Cantel portfolio of leading infection prevention dental consumables is a perfect match to further enhance our ability to serve our dental customers."
 
Hu-Friedy has built a position as a leader in the dental instruments and Instrument Management System ("IMS") categories, with a 90 percent branded portfolio, enjoying nearly 100 percent brand awareness among dentists and hygienists.
 
Hu-Friedy has a large and sophisticated sales and customer care team, supported by a strong marketing organization using industry-leading data analytics. This will enhance Cantel's commercial and customer engagement capabilities within the dental industry, which is expected to enable long-term growth. In addition, Hu-Friedy's leading education and training offerings, well-established presence in dental schools and continued work and engagement with key opinion leaders will enable the combined business to provide a differentiated education and broad solution-based offering to the dental industry.
 
Ron Saslow and Ken Serota, president of Hu-Friedy, will lead the combined dental business post-closing. Gary Steinberg, who has successfully built the Cantel dental division since the acquisition of Crosstex, will assist in the post-close transition and integration of these two businesses and will retire at the end of the calendar year.
 
Under the terms of the acquisition, Cantel will pay $725 million upfront for Hu-Friedy, up to $60 million of which will be paid in Cantel stock (with the specific amount at Cantel's election) with the remainder to be paid in cash. An additional $50 million in potential cash and stock earnout payments may be payable to Hu-Friedy shareholders upon achievement of certain commercial milestones in the eighteen months following closing of the transaction.
 
As a result of the transaction structure, the acquisition will generate an anticipated tax benefit, which Cantel has valued at more than $100 million. Cantel expects this tax benefit to positively impact cash flows over approximately 15 years. Net of this tax benefit, the total consideration implied would be $625 million upfront and up to $675 million including earnout payments.

The combination is expected to generate annual cost synergies of at least $10 million by the third year following closing of the transaction.
 
The acquisition is also expected to unlock potential for significant accelerated revenue growth. Cantel expects to realize potential revenue synergies by integrating Crosstex's best-in-class infection prevention consumables with Hu-Friedy's IMS product offering in new and existing IMS users. In addition, Hu-Friedy's strong presence in dental and hygiene schools represents a key opportunity to cross-sell the Cantel consumables portfolio. 
 
Cantel expects the acquisition of Hu-Friedy to be accretive to the company's overall financial outlook. The transaction is expected to be dilutive to GAAP earnings per diluted share in fiscal year 2020 due to acquisition-related costs, but is expected to be accretive to GAAP earnings per diluted share in fiscal year 2021 and beyond. On a non-GAAP earnings basis, Cantel expects the transaction to be approximately 10 percent accretive in its fiscal year ended 2020, with mid-teens accretion in fiscal year 2021 and further accretion thereafter. The acquisition is also expected to be accretive to margins at both the divisional and Cantel levels. The company expects the transaction to exceed its cost of capital by the fourth year after closing.
 
The cash portion of the transaction is being financed through a combination of the net proceeds of the company's amended and restated credit facility, new term loan financing and cash on hand. Cantel anticipates that the company's enhanced financial profile and scale following closing of the transaction will enable strong cash flow generation and accelerated deleveraging.
 
The transaction has been approved by the boards of directors of both companies and is expected to close in the first quarter of Cantel's fiscal year 2020, subject to regulatory approvals and other customary closing conditions.
 
Perella Weinberg Partners LP served as financial advisor to Cantel and Wachtell, Lipton, Rosen & Katz served as its legal advisor. Moelis & Company LLC served as financial advisor to Hu-Friedy and Latham & Watkins LLP served as its legal advisor.