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Medtronic to Acquire Kyphon for $3.9 Billion

Medical technology company Medtronic said Friday that it would acquire Kyphon for $3.9 billion to expand its spinal treatment business.
Medtronic , the world's largest maker of medical devices including artificial spinal discs, heart pacemakers and insulin pumps, will pay $71 cash for each Kyphon share, a 32 percent premium over Thursday's closing price.

The transaction, slated to close in the first quarter of 2008, is expected to be neutral to Medtronic earnings in the first full fiscal year after closing and boost earnings thereafter. Medtronic expects the deal, which carries a $95 million break-up fee, to generate revenue, cost and tax benefits.

"Long-term investors will like this deal," said Piper Jaffray analyst Tim Nelson. "With Kyphon, Medtronic will cover the complete arena in spine."

During a conference call with analysts, Medtronic Chairman and Chief Executive Art Collins noted that Medtronic's current spinal product offerings focus on invasive procedures, like spinal fusion, aimed at the younger patient suffering from scoliosis and degenerative disc disease.

Kyphon's products, he said, address the faster-growing older population suffering from vertebral compression fractures and spinal stenosis. Its products primarily employ minimally-invasive techniques and procedures.

The deal, which does not preclude Medtronic from pursuing more acquisitions, will allow the company to broaden its product line, expertise and customer base, he said.

A Hefty Price

Jeffrey Jonas, portfolio manager for Gamco Medical Opportunities Fund, characterized the deal as neutral to positive, noting Medtronic was paying a hefty price of six times sales.

"But they're getting some great products that will fill in gaps in their spinal portfolio. And Kyphon's growth is phenomenal ... 30 percent per year, and (Medtronic) will get lots of synergies."

Joanne Wuensch, an analyst with BMO Capital Markets, said in a research report, "We believe that this acquisition is an excellent fit for Medtronic, combining leading technology, a rapidly growing top line, a top-notch sales presence, and creating a stronghold in the spinal industry."

But some shareholders were less enthusiastic.

Michael Barr, an analyst with Victory Capital Management, which owns shares of Medtronic, said, "I hope they can make a good case that this is not a departure from what they've said -- that they'd do small deals. I'm a bit surprised."

He added, "I'm a return-on-capital investor and I don't like to see too many big deals. I can't put this in the category of too big, but I hope there aren't more. This deal definitely puts the spotlight on (calendar) 2008 earnings."

Larry Biegelsen, an analyst with Wachovia, said this acquisition is part of a larger trend toward more consolidation in the sector.

"With 150 spine companies in attendance at last year's North American Spine Society, a fast growing market, and larger firms such as Medtronic and Johnson & Johnson losing share to smaller firms such as Kyphon and and Nuvasive, we speculated that an industry consolidation was inevitable. The Medtronic-Kyphon deal represents the first significant move in this direction."

Medtronic shares were down 59 cents to $50.33 around midday in a weaker broad market. Kyphon shares were up 25 percent or $13.32 at $67.00.

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