Tuesday, December 16, 1997
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Sulzer Medica to Fuse with Spine-Tech

Switzerland-based orthopedics company Sulzer Medica Ltd. (NYSE: SM) announced this morning that it has signed an agreement to merge with Minneapolis-based medical device maker Spine-Tech (Nasdaq: SPYN), acquiring all of its outstanding stock for $52 per share in cash. Spine-Tech, a supplier of "fusion cage devices" that are implanted between spinal vertebrae to promote fusion, gained $5 15/16 to $51 7/16. Spine-Tech's share price has shot up roughly 55% since the end of November and recently gained some momentum after potential competitor Sofamor Danek Group (NYSE: SDG) failed to receive backing for its Novus LC interbody spinal fusion cage from a Food and Drug Administration advisory panel. Sulzer's stable of products already includes heart valves, pacemakers, defibrillators, ablation catheters, vascular grafts, and a host of artificial implants. The company had expressed an interest in entering the high-growth, high-margin "spinal market" segment during its initial public offering in July, and will use the 800 million franc proceeds to fund the acquisition.

The total value of the transaction comes in at a hefty $595 million, which is about 13 times the trailing sales of Spine-Tech. Considering that Spine-Tech has yet to generate a positive return on equity, Sulzer is obviously counting on the expected 70% growth in the market for spinal products (to an expected $185 million next year) to generate its return on investment. In Sulzer's favor is a marketplace that is relatively uncluttered. With the aforementioned denial of Sofamor Danek's attempts to market its device, the remaining players can continue to sell their products for up to twelve months with no foreseeable competition. That means Sulzer and its main competitor U.S. Surgical (NYSE: USS), which acquired Surgical Dynamics in order to gain entrance to the spinal products market, will have free rein.

Since the FDA approved Spine-Tech's principal product, the BAK implant, in September of 1996, the company has sold $53 million worth of the devices through November 1997. This product matches up directly with U.S. Surgical's RAY Cage product, which has generated $18 million in sales in its most recent quarter. Steven Abernathy, founder of a partnership called Interactive Investing (a money management group that exploits the benefits of information sharing between professionals in various fields and money managers), began following Spine-Tech in the summer of 1996. After consulting physicians that used both products, Abernathy discovered that one of the physicians that assisted in the development of the BAK cage had switched to using the RAY Cage in his procedures. Abernathy's subsequent investment in RAY Cage initially paid off as Spine-Tech plummeted 50% in a three-month period. However, the long-term moral of this story is that even ostensibly less desirable products can become very visible in a limited field, as evidenced by Spine-Tech's annualized compound return of 60% since its IPO in mid-1995.


Electronics contract manufacturer Solectron Corp. (NYSE: SLR) jumped $5 1/8 to $34 7/8 after reporting Q1 EPS of $0.38, up 32% from the previous year's per-share earnings. Although this quarter's EPS fell below the mean analyst estimate of $0.42, Solectron reportedly issued soothing guidance on its conference call, drawing an upgrade to "strong buy" from "buy" from BT Alex. Brown. Other members of the contract manufacturing sector also moved up smartly this morning, with Jabil Circuit (Nasdaq: JBIL) gaining $2 3/4 to $37 5/8 in advance of its earnings report this evening, and SCI Systems (NYSE: SCI), Smart Modular Technologies (Nasdaq: SMOD), and AdFlex Solutions (Nasdaq: AFLX) all making strong moves.

Suppliers to contract manufacturers are also doing well with the encouraging guidance from Solectron today. Integrated circuit manufacturer Siliconix (Nasdaq: SILI) picked up $5 1/4 to $44 1/4 while Vishay Intertechnology (NYSE: VSH), a maker of capacitors and resistors used in circuit boards, gained $1 1/2 to $20 5/16 on that news as well as on announcing an agreement to purchase the semiconductor business of Daimler Benz AG (NYSE: DAI) for $500 million.

Neogen Corp. (Nasdaq: NEOG) gained $1 1/4 to $11 1/8 after announcing that it has released a test to detect Histamine, a chemical contaminant that shows up in seafood when it has been stored improperly.

Powerwave Technologies (Nasdaq: PWAV) rose $2 to $18 15/16 after the manufacturer of radio frequency power amplifiers said sales of its multi-carrier cellular products to customers outside of Korea will more than double this quarter.

Following a number of tough sessions softening the stock prices of oil and gas drillers and oil services companies, offshore rig builder and shipyard Friede Goldman International (Nasdaq: FGII) gained $2 9/16 to $31 3/4 and offshore driller Global Marine (NYSE: GLM) picked up $1 5/8 to $25 3/8.

Information provider Primark Corp. (NYSE: PMK), which supplies such services as Baseline, I/B/E/S, and Yankee Group market research, gained $3 to $40 5/8 after The New York Post reported that British-based Reuters plc (Nasdaq: RTRSY) will bid $1.5 billion for Primark's business information unit. That would place the value on that unit -- pretty much the meat of the company -- at just under $55 per share, according to this rumor.

Cornell Corrections Corp.
(NYSE: CRN) rose $1 1/2 to $18 1/8 after announcing an agreement under which the prison operator will own and operate an 812-bed medium security detention facility in Oklahoma.


Office equipment distributor Danka Business Systems (Nasdaq: DANKY) was pounded for a $16 1/2 loss to $14 1/2 after the company said its global integration project is not progressing as well as planned. The company warned investors that it will report Q3 EPS of $0.21 to $0.24, below the mean analyst estimate of $0.43, as revenues will fall up to 6% short of company expectations.

Famous Dave's of America (Nasdaq: DAVE) lost $6 3/16 to $10 7/8 after the roadhouse-style barbecue restaurant operator said its estimates of revenue growth for the fourth quarter were too optimistic as newer units didn't develop as well as expected. The company consequently expects to report a loss of approximately $0.23 per share (before charges), below the two-analyst estimate of $0.16 listed by First Call.

Extended stay hotel operator Suburban Lodges (Nasdaq: SLAM) was slammed for a $6 23/32 loss to $12 7/16 on reporting that it expects to report Q4 EPS of $0.12, well short of the mean analyst estimate of $0.18. The "SLAMmer" said hotel pre-opening costs are putting a drag on earnings because fully half of the company's planned hotel openings for the year will take place in the last two months of the fourth quarter.

American Freightways (Nasdaq: AFWY) hit a speed bump this morning, falling $4 3/4 to $9 7/8 after the trucker said heavy operating expenses and less-than-expected revenue growth will bring fourth quarter EPS down to the $0.05 level, short of the $0.19 analysts had been projecting.

Ready-to-assemble furniture manufacturer O'Sullivan Industries (NYSE: OSU) slid $1 11/16 to $10 11/16 on advising investors that it expects to report Q2 EPS of approximately $0.19 to $0.22, below estimates of $0.28, due to lower-than-expected sales to the company's largest customers and a lower-margin sales mix during the quarter. O'Sullivan also said that retooling of its production line and software upgrades on its lines will impact third and fourth quarter results, keeping year-over-year sales gains in the low single-digit range and attenuating profits to a level slightly below last year's second half results.

Christiana Companies (NYSE: CST) dropped $4 9/16 to $36 9/16 after the freight logistics and warehousing company agreed to be acquired by oilfield equipment manufacturer EVI Inc. (NYSE: EVI). Christiana shareholders will receive 0.72 shares of EVI for each Christiana share, plus approximately $5 per share in cash and a contingent right to receive $1.85 per share in cash in five years. The total package valued Christiana at $35.80 per share as of last night's close, 13% below its closing price.

Computer systems integrator Pomeroy Computer Resources (Nasdaq: PMRY) was bounced for a $1 5/8 loss to $16 3/4 after the company said that it will not supply computer products to the headquarters operation of hospital company Columbia/HCA (NYSE: COL) in 1998. Pomeroy added that it will supply hospitals in the Columbia chain, though.


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