Medtronic bolsters foothold in China

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Medtronic is to pay $816m for China’s KangHui Medical, which makes implants to treat orthopaedic conditions, as the US medical devices maker tries to bolster its foothold in one of the world’s fastest growing healthcare markets.

The deal could help improve the growth prospects for one of the world’s biggest medical device makers at a time when it is under pressure from tightening government budgets in the developed world in its core cardiac and spinal products.

China’s healthcare market is growing rapidly, fuelled by Beijing’s efforts to improve medical care to defuse potential social unrest and respond to the growth OF the country’s middle classes.

Foreign companies and private equity investors have been looking specifically at sectors such as treatments for kidney- and diabetes-related conditions as changes in lifestyle and behaviour lead to higher occurrences of such problems.

The Chinese medical devices sector alone is expected to grow at an annualised 12 per cent rate, according to a survey this year by Citigroup. This has sparked strong interest from foreign groups looking for acquisitions. Smiths Group of the UK last year bought Zhejiang Zheda Medical Instrument while Vasomedical bought two China-based medical device companies, Life Enhancement Technology and Biox Instruments.

Medtronic has already spent money on establishing a presence in China, paying $221m for a 15 per cent stake in Shandong Weigao Group Medical Polymer in 2007. Medtronic aims to make one-fifth of its sales in emerging markets by 2016.

Omar Ishrak, Medtronic’s chairman and chief executive, said the deal fitted well with this strategy. “KangHui represents a significant investment in China, accelerating Medtronic’s overall globalisation strategy with an established . . . distribution network and strong research and development and operational capabilities.”

Chris O’Connell, president of Medtronic’s restorative therapies group, said: “China is one of the fastest growing medical device markets, with significant scale opportunities, and now Medtronic will establish a bigger and more direct local presence.”

Medtronic will pay $30.75 per American depositary receipt for KangHui, which is based in Changzhuo, Jiangsu, but listed on the New York Stock Exchange, a 22.5 per cent premium to Thursday’s close. KangHui’s cash holdings mean the enterprise value of the deal is $755m.

At this price Medtronic is paying about 32 times 2011 earnings before interest, depreciation, taxes and amortisation. KangHui, which was founded in 1997, saw profits rise 21 per cent to Rmb121m ($19.3m) last year on sales of Rmb327m, according to Bloomberg data.

Libo Yang, KangHui’s chief executive, said his company would bring to Medtronic local operating expertise in China, including a wide distribution network, local manufacturing and R&D.

KangHui’s ADRs climbed 21 per cent to $30.38. They have risen more than 50 per cent since the end of June. Medtronic’s shares closed down 0.8 per cent at $43.12.

Additional reporting by Patti Waldmeir in Shanghai

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