Smith Group to sell Smiths Medical to ICU Medical

Smiths Group plc

Smiths Group plc (LON:SMIN) has announces that it has agreed the sale of Smiths Medical to ICU Medical, Inc on terms that are superior to the previously announced transaction entered into with TA Associates on 2 August 2021.  The ICU Transaction delivers $0.4bn more value to shareholders and carries future material upside through both participation in ICU Medical equity and a $0.1bn ‘earnout’. In light of this, the Smiths board has withdrawn its recommendation of the TA Transaction.

Highlights

·    Agreement to sell Smiths Medical to ICU Medical on terms which are superior to previously announced TA Transaction

·    The ICU Transaction values Smiths Medical at an enterprise value of $2.7bn, plus an additional $0.1bn contingent on the future share price performance of the enlarged ICU Medical business

·    After deduction of debt and other liabilities, the equity value of the ICU Transaction is $2.4bn, approximately $0.4bn higher than under the TA Transaction

·    Smiths expects to receive initial net cash proceeds on completion of the ICU Transaction of $1.85bn (equivalent to £1.34bn), about $50m more than under the TA Transaction

·    In addition to the initial net cash proceeds, Smiths will also receive 2.5m new ICU Medical shares, worth $0.5bn at ICU Medical’s closing share price on 7 September 2021 of $205.98, equivalent to approximately 10% of the fully diluted enlarged ICU Medical share capital

·    As shareholder input has already informed the amount and mechanism of return in the TA Transaction, the same approach is proposed in the ICU Transaction. Specifically, the Board proposes to return 55% (equivalent to £737m at current exchange rates) of initial net cash proceeds to shareholders via a share buyback.  The retained net cash proceeds will be used to create a strong balance sheet and to support investment in value creative growth opportunities

·    The sale of Smiths Medical simplifies and positions Smiths for focused growth in its core industrial technology business

·    Completion and receipt of the initial cash proceeds is expected in the first half calendar year 2022, subject to approval by Smiths’ shareholders and customary regulatory approvals

·    The Board has withdrawn its recommendation of the TA Transaction

On 2 August 2021, Smiths announced that it had entered into an agreement for the sale of Smiths Medical to Trulli Bidco Limited, a wholly owned subsidiary of funds advised by TA Associates LLP. The TA Transaction valued Smiths Medical at an enterprise value of $2.3bn (equivalent to £1.7bn), plus an additional $0.2bn contingent on the future performance of Smiths Medical and was unanimously recommended by the Board. The TA Transaction was conditional upon the approval of Smiths shareholders and customary regulatory clearances and would have been expected to complete by the end of calendar year 2021. At the point of announcement, the TA Transaction was superior to all other proposals received during the separation process.

After announcement of the TA Transaction, ICU Medical offered to acquire Smiths Medical on terms that are superior to those of the TA Transaction.  The ICU Transaction values Smiths Medical at a headline enterprise value of $2.7bn (equivalent to £2.0bn), on a cash and debt free basis.  

After deduction of debt and other liabilities, the equity value of the ICU Transaction is $2.4bn, approximately $0.4bn higher than the TA Transaction. The ICU Transaction consideration is comprised of $1.85bn in cash and 2.5m of new ICU Medical shares, worth $0.5bn at ICU Medical’s closing share price on 7 September 2021 of $205.98, equivalent to approximately 10% of the fully diluted enlarged ICU Medical share capital.  

The ICU Transaction will create an expanded global medical device company, bringing a combined portfolio of products and solutions to more patients and providers worldwide.  The combination represents a meaningful value creation opportunity through both revenue and cost synergies.  Smiths will participate in this value creation through its 2.5m ICU Medical shares and an additional $0.1bn consideration contingent on the future share price performance of the enlarged ICU Medical business. The earnout will be satisfied in cash and requires Smiths to retain beneficial ownership of at least 1.25m ICU Medical shares and for the ICU Medical share price to average $300 or more for any 30 day period during the first three years post completion, or for any 45 day period in the fourth year post completion.

As part of the ICU Transaction, Smiths and ICU Medical have agreed the terms of a shareholders’ agreement to govern the relationship between Smiths and ICU Medical in respect of Smiths’ holding of shares in ICU Medical.  Smiths shall have the right to nominate up to one non-executive director to the ICU Medical board and appoint such director to the audit committee of ICU Medical for as long as Smiths owns at least 5% of the fully diluted enlarged ICU Medical share capital.  Under the terms of the shareholders’ agreement, Smiths’ shares in ICU Medical shall be subject to a six-month lock-up.

The ICU Transaction will be a Class 1 transaction under the UK Listing Rules and will therefore be conditional upon the approval of Smiths’ shareholders. It will also be conditional on receipt of certain merger and other regulatory approvals and the termination of the sale agreement with Trulli Bidco Limited. ICU Medical has provided strong contractual commitments to Smiths to secure the necessary merger and foreign direct investment clearances and approvals by 8 March 2022.  However, in certain limited circumstances, the Long Stop Date may be extended to 8 March 2023.  ICU Medical has further agreed that, if it failed to satisfy these anti-trust and other regulatory conditions by the Long Stop Date, it would pay Smiths a break fee of $300m, $200m of which would be payable in cash with the balance of $100m to be settled by the issuance to Smiths of new ICU Medical shares.  Smiths is not required to pay any break fee in the event that the transaction does not complete.  ICU Medical will also pay $250,000 of cash per day to compensate Smiths for the cash which is expected to be generated by Smiths Medical from 1 January 2022 until the ICU Transaction closes.

Under French employment laws, prior to making any decision to enter into the ICU Transaction (including by way of entry into any binding share purchase agreement), Smiths Medical is required to carry out an information and consultation process with the Social and Economic Committee of Smiths Medical France SAS.  It is intended that the consultation process regarding the ICU Transaction will begin following this announcement.  Whilst Smiths will ensure the views of the French Works Council are properly considered, the French Works Council opinion on the ICU Medical Offer is consultative and not binding on Smiths or ICU Medical.

The Board, taking into account its overarching statutory and fiduciary duties, has carefully considered the ICU Transaction from a value perspective and evaluated execution risks associated with it and the timing to close.  The Board considers that the ICU Transaction is superior to the TA Transaction and accordingly, Smiths has withdrawn its recommendation of the TA Transaction and has entered into a put option agreement (the “Put Option”) with ICU Medical pursuant to which, following completion of the French Employment Consultation, Smiths has the unilateral and unconditional right to require ICU Medical to enter into a binding share purchase agreement on the terms reflected in the ICU Transaction.  If Smiths chooses to exercise the Put Option following the end of the consultation process, the Board expects to unanimously recommend the ICU Transaction, and to send the requisite circular to Smiths’ shareholders requesting their approval of it.

As shareholder input already informed the amount and mechanism of capital return in the TA Transaction, the same approach is proposed in the ICU Transaction.  Following completion of the ICU Transaction, the Board proposes to return 55% (equivalent to £737m at current exchange rates) of initial net cash proceeds to shareholders via a share buyback programme.  The retained net cash proceeds will be used to create a strong balance sheet and to support investment in value creative growth opportunities.

The Board announces that it is withdrawing its recommendation of the TA Transaction and accordingly, at the General Meeting convened for 17 September 2021 to approve the TA Transaction (the “TA General Meeting”) the Chairman will propose a resolution to adjourn the TA General Meeting.  Shareholders are advised to take no action in respect of the TA General Meeting at this time.  Further information will be provided in respect of the ICU Transaction and the actions required of shareholders in respect of it as soon as reasonably practicable following any exercise of the Put Option. 

Paul Keel, CEO, Smiths Group plc, said:

“Delivering on our commitment to maximise value, the ICU Transaction provides both a higher value for Smiths’ shareholders, as well as future value creation through our 10% holding of the enlarged combined group and a potential $0.1bn additional contingent consideration.  We are focused on concluding this superior transaction and on driving Smiths Group forward, delivering on our significant potential as a leading industrial technology group united by shared purpose, business characteristics and a common operating model.”

Vivek Jain, CEO, ICU Medical, Inc., said:

“The combination of these two businesses makes sense for the medical device marketplace and fits well with ICU Medical’s existing business. By joining two complementary product portfolios to create a leading IV therapy company, we can help simplify customer workflows and add significant value and choice. Together, we will be a scaled global competitor and a US-based medical device company that increases the stability of the medical supply chain and can grow as clinical care models evolve. From an economic perspective, we believe we have presented a well-structured offer that considers the existing offer, minimizes risk, and offers upside to all stakeholders. We look forward to serving more customers as we continue to bring clinical and economic value to the marketplace.”

Investor and analyst briefing

A conference call for investors and analysts will be held at 08.30am BST on 8 September 2021.  The presentation to be discussed on the conference call, together with a copy of this announcement, will be available on the Smiths Group website: www.smiths.com/investors/results-reports-and-presentations 

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