Orthofix Buys Breg... combined sales rise to nearly $300 million and moves OFIX's estimated 2004 EPS to $2.60 from an estimated $1.70 in 2003.
BY EDITOR, NOVEMBER 24, 2003
Charlie Federico liked his Physio-Stim distributor so much, that he decided to buy the company – for $150 million or 2.6x sales. This will be, by far, the largest transaction in Orthofix's history – and, we think, qualifies and that company's defining transaction.
Orthofix, who'se signature products are the Spinal Stim and Physio-Stim lines of electromagnetic bone growth stimulators, such fracture management products as the XCaliber family of external fixators and the Orthotrac' vest for low back pain has agreed to acquire Breg, Inc., a 13 year-old manufacturer and distributor of more classic bracing and cold therapy products, for $150 million.
Breg, which had been founded by the same management team that had many years ago founded industry leader DJ Orthopedics, had built a strong distribution franchise over the past dozen years in the orthopedicists office. This opens up new distribution avenues for Orthofix's other product lines (the Orthotac' line of pneumatic bracing for the back comes to mind). Similarly, Orthofix's distribution capabilities in 64 countries outside the United States opens that up for Breg's extensive line of ankle, shoulder and back braces as well as its inexpensive but easy-to-use line of cold therapy products. Breg's sales in 2003 are expected to reach $58 million, up 15%. Earnings are expected to reach $7.7 million. In terms of sales per employee, net profit margin and revenue growth, Breg had better numbers than Orthofix. Yet, the purchase price valuation was less than Orthofix's P/E ratio and its price-to-sales ratio.
Management's EPS guidance for 2004 rose roughly $0.30 per share as a result of this combination. Applying OFIX's existing multiple to the incremental earnings gain adds, in theory, $6 per share to the company's share price. Indeed, the market moved it up $3 on the day of the announcement and is waiting, we'd expect, for the deal to finalize and for the inevitable integration issues to surface before awarding the company the full measure of theoretical value.. But, we note, management's guidance does not include the effects of distribution synergies.
At $300 million in revenues, Orthofix becomes the largest bracing company in the world – surpassing DJ Orthopedic's $260 million in estimated 2004 revenues. With an estimated $40 million in earnings, Orthofix is now the most profitable company in its industry segment.
Strategically, it is noteworthy that OFIX's announcement comes just four weeks after DJ Orthopedics announced its intention to acquire Orthologic's electromagnetic bone stimulation business for $90 million. With that purchase, DJO moved into one of Orthofix's markets – non invasive, electro magnetic bone stimulation. This is a rapidly growing, very profitable line of business and reflects the new trend in bracing toward active therapeutic, high value added products. Likewise, Orthofix's acquisition of Breg moves OFIX into ankle bracing, knee bracing, more classic lumbar spine support, shoulder stabilizers and a line of inexpensive, but popular cold therapy products to complement. Strategically, it appears that the two largest companies in bracing are moving closer to each other in terms of product lines and markets. DJO's has stated that it is seeking a larger presence in the orthopedic office and is excited about its line of cold therapy products. OFIX has just entered those two markets with Breg. Into the ortho office, Breg will now be distributing Orthofix's stimulation product lines, high-technology back bracing lines and its external fixation and bone lengthening products.
