STERIS Corporation announced today the signing of a definitive agreement to acquire all the outstanding shares of privately-owned United States Endoscopy Group, Inc. (US Endoscopy). Founded in 1991 and based in Mentor, Ohio, US Endoscopy is a leader in the design, manufacture and sale of therapeutic and diagnostic medical devices and support accessories used in the gastrointestinal (GI) endoscopy markets worldwide. With the acquisition of US Endoscopy, STERIS will significantly expand its presence in the GI market and gain direct access to the procedural spaces in the GI market with a franchise of proprietary, single-use consumable medical devices.
The addition of US Endoscopy to our current portfolio is a natural extension of our presence in the GI market, says Walt Rosebrough, president and CEO of STERIS Corporation. They have generated double-digit organic growth for many years through successful new product development, and the acquisition provides STERIS immediate scale with a direct sales force in the U.S. and a strong brand name. This acquisition is aligned with our strategy to expand in areas with attractive market dynamics that are adjacent to our current businesses. We are impressed with the strength of their management team and look forward to working with them to capture the opportunities ahead of us.
We are absolutely delighted to have the opportunity to become part of STERIS, a company we respect and know well, says Gulam Khan, president, CEO and co-chairman of US Endoscopy. Not only will we gain the size and scale necessary to continue to innovate and grow over the long term, we will also ensure that we can and will remain a vital part of the greater Cleveland community. While we have had great success the last two decades, having the support of STERIS will better enable us to take full advantage of global opportunities.
STERIS has a strong presence in the procedural spaces within the hospital, in particular the operating room, but has not historically had a presence in the procedural spaces within the GI environment. The acquisition will add direct access to a multi-billion dollar global market, where US Endoscopy has focused on technology and innovation to build a pipeline of new products which propelled their revenue growth to greater than 15 percent compounded over the past five years, and allows for attractive margins.
STERIS has agreed to pay $270 million in an all cash transaction to acquire US Endoscopy. In calendar 2011, US Endoscopy generated revenue of approximately $70 million and operating income of approximately $14 million. After adjusting for depreciation and amortization, shareholder expenses and other non-recurring items, adjusted operating income would have been approximately $20 million in 2011. STERIS anticipates that the acquisition will qualify for a joint election tax benefit under Section 338(h)(10) of the Internal Revenue Code, which allows goodwill and intangibles to be fully deductible for tax purposes. Giving effect to the present value of the anticipated tax benefit, the purchase price is reduced to approximately $220 million. After consideration of this benefit, the price equates to roughly three times revenue and eleven times adjusted operating income. Due to transaction and integration costs and a less than full-year impact of earnings, the transaction is anticipated to be dilutive by approximately $0.05 to STERISs earnings in fiscal 2013, but accretive in fiscal 2014 and beyond. Management believes that the dilutive effect can be absorbed within its current earnings per share outlook of $2.00 to $2.20 per diluted share for fiscal 2013.
The transaction is subject to certain closing conditions and is expected to close by the end of the second quarter of fiscal 2013. STERIS will finance the acquisition through a combination of cash on hand and borrowings under its existing credit facility. The business will be integrated into STERISs Healthcare business segment. STERIS will also be purchasing certain land and buildings utilized by the US Endoscopy business for approximately $7.0 million.
Lazard acted as financial advisor and Jones Day acted as legal advisor to STERIS in connection with the acquisition. Cohen & Company, Ltd. / Cohen Capital Advisors, Ltd. acted as financial advisor and Baker Hostetler served as legal advisor for US Endoscopy.