Late Thursday, Medtronic announced that it is buying Chinese orthopedics company China Kanghui Holdings for $816 million in cash. The deal, excluding Kanghui’s cash was worth $755 million.
The move may have several ramifications not just for Medtronic’s joint venture with another Chinese company Shandong Weigao, but also for other U.S. orthopedics multinationals.
Noting that Medtronic has paid a premium to buy Kanghui, J.P. Morgan analyst David Lewsis, wrote in a research note that 20 percent of the Chinese company’s sales comes from overseas. Indeed Kanghui’s website notes that its products are sold in more than 28 countries.
In the near future, the deal will likely not have an effect on top orthpedics companies. But longer term the story may be quite different.
It “couldcause increased competition and pricing pressure or strategic shifts at multiple companies including Stryker, Zimmer, Johnson & Johnson, andBiomet,” Lewis wrote.
However, the acquisition could have much more of an immediate impact on the joint venture that Medtronic has China. Back in 2007, Medtronic entered into a JV withShandong Weigao Group Medical Polymer Company Limited with Medtronic taking a majority stake in the JV with 51 percent. Medtronic also took a 15 percent equity stake in Weigao. Here’s what Lewis (who, however described the JV as a 50-50 partnership) believes might happen:
While management has not stated that it is no longer committed to Weigao, in our view, Medtronic’s purchase of Kanghui may signal the end of its joint venture with Weigao, which will likely be dissolved by early 2014. Medtronic has the option to purchase or extend the JV, but owning Kanghui would provide longer term upside and may better fit the company’s strategy in emerging markets. Sales from the Kanghui acquisition would we estimate roughly offset the lost sales from ending the Weigao JV.
In 2011, Kanghui had $52 million in sales. The company’s stock, which trades in the U.S. on the New York Stock Exchange was up 21 percent to $30.4 on the news of Medtronic’s acquisition. Medtronic’s, however, was down by 1.22 percent to $42.9 just a little before noon Easter Standard Time.