Eddy Elfenbein submits:
Dear Shareholders of Biomet,
On Monday, the Board of Directors of Biomet (Pending:BMET) announced that it agreed to a buyout offer from a consortium of private equity frims. The consortium consists of the Blackstone Group, Goldman Sachs Capital Partners, Kohlberg Kravis Roberts, Texas Pacific Group and one of Biomet’s founders, Dane Miller. The deal is for $10.9 billion ($44 a share) and is due to be completed by October 31, 2007.
We believe this is a poor deal for shareholders of Biomet and we urge all shareholders to vote against it.
Biomet’s track record is known to everyone. For the last three decades, the company has been one of the great success stories of American free enterprise. Biomet has delivered record sales and earnings every year since it began operations in 1977. This is an astounding achievement. Moreover, the company’s products have helped millions of people all over the world lead a better life. This is something we all should be proud of.
In 1977, the company had sales of just $17,000. For FY 2006, Biomet’s sales exceeded $2 billion. Today Biomet employs over 6,000 people. Since 1982, the stock has split nine times. In the last 20 years, shares of Biomet have increased by more than 40-fold.
Biomet has regularly had its return-on-equity top 20%. Additionally, the company has no long-term debt and a very healthy cash position.
Give all these facts, we’re very disturbed by management’s decision to sell Biomet for such a low price. Monday’s press release notes that $44 is “a 27% premium over Biomet's closing price on April 3, 2006.”
This is a misleading fact that was repeated with question through much of the financial media. This “premium” is measured from over eight months ago to more than ten months in the future. Annualized, this premium works out to 16.1% which is less than the shares’ long-term performance.
Additionally, we believe the shares were unusually low-priced in April so the appearance of a premium is illusionary. Forty-four dollars a share is not only well below Biomet’s high price from 2004, but it’s also below the average share price for the entire second half of 2004. Since that time, Biomet’s sales and earnings have continued to increase.
The graph above shows Biomet's share price (black line) with the $44 buyout offer (red line). The yellow line is Biomet's earnings-per-share (right scale), and the blue portion is Wall Street's consensus projection. The earnings and share prices and scaled by a ratio of 25 to 1.
For a number of reasons, shares of Biomet and the entire health care sector have been punished over the past year. This should not be a reflection on Biomet’s long-term intrinsic value. And it should not be a reason to sell the company at a distressed price. Bear in mind that the stock often traded above 25 times earnings. Despite being called a premium, the private equity deal represents a substantial discount to Biomet’s historic valuation. We have to asked the Board of Directors, "What’s the hurry?"
While there certainly are problems with Biomet’s business, particularly in the spinal business, these problems are a small part of the company’s overall business. Consider that over the next decade, the number of Americans aged 55 to 75 will nearly double. David Phillips at 10-Q Detective notes that “hip and knee and extremity joint replacements account for more than 95% of all orthopedic implants and Biomet holds about 12% of this market, which accounted for 68% of the company's net sales in FY 2006.”
We’re not opposed to a buyout offer, but we encourage the Board of Directors to consider other offers. The present offer undervalues Biomet’s potential and does not adequately reflects its proper value.
We encourage all shareholders to let the board know that this deal is unsatisfactory and not in the best interest of shareholders. If it comes to vote, we encourage a no vote on the present offer.
Crossing Wall Street