The Biomet LBO: How Four Sponsors Put $5.2B of Equity Into a Peak-Cycle Medical Device Buyout — and Waited Eight Years to Get It Back

In the fall of 2007, four of the largest private equity firms in the world jointly took Biomet, Inc. — the Warsaw, Indiana orthopedic implants maker — private for $11.4 billion. Blackstone, Goldman Sachs Capital Partners, KKR and TPG each wrote a $1.3 billion equity check. The deal was the largest medical device LBO ever at the moment it closed, and it closed weeks before Lehman.

Then they waited. Eight years.

The deal didn't blow up — Biomet grew revenue through the financial crisis, serviced its debt, and refinanced in 2012. But by September 2013, KKR was still carrying its stake at roughly 80 cents on the dollar. In February 2014 the sponsors filed for a $1 billion IPO because they couldn't see another way out. Six weeks later Zimmer Holdings interrupted the IPO with a $13.35 billion stock-and-cash merger offer that the consortium accepted. The deal closed June 24, 2015 as Zimmer Biomet Holdings.

This is what a four-sponsor club deal looks like when it works. Barely. Which is to say — this is why the industry mostly stopped doing them.

What a club deal is, and why 2007 was the high-water mark

A club deal is a leveraged buyout in which two or more sponsors jointly write the equity check and share governance. The classic pre-2008 structure had three advantages for the sponsors:

1. Underwrite bigger deals. A single $1-$2B fund can't comfortably write a $5B equity check into one asset. Clubbing lets each sponsor stay inside its concentration limit while still bidding on mega-cap targets.
2. Diffuse diligence risk. Four partners each doing their own quality-of-earnings pass is more scrutiny than any single sponsor would run.
3. Price discipline through consensus. You can't talk four committees into an aggressive price if the asset doesn't justify it.

In practice the 2005-2007 club-deal cohort — SunGard (seven sponsors), Freescale (four), HCA (two plus the Frist family), Nielsen VNU (six), Harrah's (two), TXU (three), Clear Channel (two), and Biomet (four) — generated some of the worst-performing mega-LBOs in PE history. Multiple US Department of Justice antitrust investigations followed, alleging the sponsors colluded to suppress deal prices. The investigations settled without findings against the firms, but club deals at mega-cap scale largely stopped after 2008 anyway, for the reason the Biomet deal illustrates: when four sponsors share one asset for nearly a decade, every GP's problems become every other GP's problem.

The Biomet entry — $11.4B at $46/share after a bump

The timeline:

The $46/share final price represented a 32.3% premium to Biomet's April 3, 2007 closing price. The transaction cost about $235 million in fees and expenses on top of the equity consideration. The four sponsors put up $5.2 billion of cash — roughly $1.3 billion each — into LVB Acquisition Holding, the special-purpose vehicle that owned the operating business.

The debt side was financed by a syndicate led by Banc of America Securities. The June 2007 commitment letter sized $6.165 billion of senior secured tender-offer facilities, up to $4.35 billion of senior secured credit facilities, and $1.015 billion of senior subordinated bridge loans — in total, well above the ~$6 billion of debt actually drawn at close. The structure that persisted into 2008 included a dollar-and-euro term loan, Rule 144A notes, and an asset-based revolving facility.

That leverage profile — roughly 1.2 turns of equity on top of ~$6 billion of debt, against a company doing ~$2.1 billion in revenue — was exactly the kind of capital structure the covenant-lite 2007 syndicated loan market would willingly fund. Twelve months later, in the aftermath of Lehman Brothers, it would have been impossible to syndicate.

For a deeper walkthrough of how the sources-and-uses table balances at mega-LBO scale and the three errors junior associates make with it, see the sources & uses post. The quick way to pressure-test the equity-check math at the Biomet leverage profile is the free debt capacity calculator — set the leverage multiple and the coverage ratio and it will surface whether the covenant or the leverage cap binds first.

How Biomet performed through the crisis

Orthopedic implants are a good LBO business on paper. Demand is procedural — hip and knee replacements driven by aging demographics, not consumer discretionary spending — and the three major players (Stryker, DePuy, Zimmer) and the Biomet-tier operators (Biomet, Smith & Nephew) had entrenched market share with pricing power. The thesis for the Biomet buyout was that cash flow would be defensible through a recession.

The thesis mostly held. Biomet's fiscal 2007 revenue was $2.11 billion. The company kept growing through 2008-2010 while most of the LBO portfolio was fighting debt crises. By May 2012 — five years into the hold — long-term debt including current maturities was still about $5.8 billion.

But two things worked against the sponsors:

The entry multiple ate most of the operating performance. Buying at ~5.4x LTM revenue (and a mid-teens multiple of EBITDA that Biomet's filings don't disclose cleanly, so I won't make up a specific number) meant that even solid EBITDA growth translated into only modest multiple-expansion-adjusted equity value gains.

Interest expense ate the free cash flow. Six billion dollars of debt at 8-11% coupons was absorbing roughly $500 million a year in cash interest — essentially all of Biomet's operating cash flow after capex. That meant limited debt paydown and limited ability to pay a dividend recap during the hold.

In August 2012 Biomet issued $1.0 billion of 6.500% senior notes due 2020. In September 2012 the company added another $825 million of the same series plus $500 million of senior subordinated notes due 2020, using the proceeds to tender for 10% senior notes and 11.625% subordinated notes maturing in 2017. The 2012 refinancing cut coupon expense by roughly 300-400 basis points on the refinanced tranches — a meaningful but not transformational improvement.

The sponsors did take some cash out through the refinancing (the LVB cash-flow statements list repurchases of LVB Acquisition shares) but it was not a Toys R Us-scale dividend recap.

The 2013 markdown — public evidence of a stuck deal

In August 2013, press reports surfaced that KKR was carrying its Biomet stake at approximately 80 cents on the dollar — a 20% paper markdown against its $1.3 billion cost basis. For a mega-LBO six years into the hold, that mark is the quantitative admission that something isn't working. Marks aren't trades, but they are what the GP tells its LPs about the asset's recoverable value, and 80 cents of cost at year six implies the GP sees a 1-1.5x gross MOIC as the realistic outcome.

The implied IRR is worse. If Biomet were sold at 1.5x MOIC at year eight — the generous read of the KKR mark — the gross IRR would be approximately 5-6%, well below the ~15-20% most PE funds target and inside what a long-dated investment-grade corporate bond would have paid over the same window.

Why mark it at all? Because fund-level accounting (ASC 820 and the AIMA/ILPA valuation guidelines) requires GPs to estimate fair value every quarter, and holding a stuck asset at cost indefinitely isn't defensible to auditors or LPs when peers have been written down. KKR's willingness to publicly carry a 20% markdown is itself a sign that the sponsor had internally priced in a modest exit.

The 2013 mark also set up the February 2014 decision. Biomet filed to IPO at the beginning of that year, chasing an exit even at a disappointing multiple. The alternative — holding further and hoping — was already seven years in and running against fund-life pressure.

The Zimmer exit — $13.35B announced, $12.03B at close

On April 24, 2014, Zimmer Holdings announced it would acquire LVB Acquisition (Biomet's parent) at a $13.35 billion enterprise value: $10.35 billion in cash plus 32.7 million Zimmer shares. At the five-day volume-weighted average Zimmer price of $91.73, the stock portion was worth about $3.0 billion. Zimmer separately committed to repay all of LVB's funded debt — reducing the net cash to the equity holders by whatever Biomet owed at close.

Zimmer financed the deal with cash on hand, a $3 billion term loan, and up to $7.66 billion of senior notes backed by a bridge facility. Zimmer's stock jumped 15% to $105.20 on announcement — the strategic rationale (consolidating the orthopedic reconstructive market and converting four sponsors' difficult exit into one acquirer's investment-grade financing) was received well by the public markets.

The deal closed June 24, 2015. By then the aggregate consideration had moved — Zimmer's Q2 2015 10-Q reports the actual aggregate paid as $12.03 billion ($8.31 billion cash plus 32.7 million shares). Each LVB share converted into $8.94 cash plus 0.0562 of a Zimmer share. Post-merger, legacy Zimmer shareholders held about 84% of the combined company; former Biomet equity holders (the four-sponsor consortium plus management rollover) held the remaining ~16%. The combined business was renamed Zimmer Biomet Holdings and now trades as ZBH.

Here's the entry-to-exit math in one table:

*Sponsor-share of the aggregate $12.03B less the ~$5-6B of LVB funded debt Zimmer separately repaid, times the sponsors' ~97% ownership of LVB equity.

The sponsors did not disclose an audited MOIC. From public filings alone, the math implies a 1.5-2.3x gross MOIC on the four-sponsor equity check over 7.75 years — roughly a 5-11% gross IRR. The spread is wide because the exact amount of LVB debt Zimmer repaid at close is a function of the final debt-and-working-capital adjustments the merger agreement provides for, and those weren't disclosed cleanly in the merger-closing filings I could locate.

If the actual outcome fell in the middle of that range — a ~1.8x gross MOIC at a ~8% gross IRR over nearly eight years — it would be exactly consistent with the KKR 2013 mark. Not a loss. Not an alpha outcome. The kind of return that an institutional LP's fixed-income benchmark would clear on its own, with no manager fee.

For a quick view of how MOIC and IRR relate to each other at long hold periods — including why 1.8x at eight years is a very different outcome from 1.8x at four years — see the MOIC vs IRR post and run numbers through the free LBO returns calculator.

Why four sponsors made this slower than two would have

The structural problem with a four-sponsor club deal only shows up in distress. In the good case, four GPs each put up equity, each take a board seat, and each benefit equally from the exit. In the bad case:

• IPO decisions require consensus across four firms with four different fund-life clocks. By 2013 the Blackstone, GS Capital Partners and TPG vintages had different years-remaining. KKR's North America Fund XI was still earlier in its hold. Agreeing on when to pull the IPO trigger — or when to accept a strategic bid at a specific multiple — required negotiation that a two-sponsor deal would have resolved faster.
• Residual positions get sticky. The sponsors emerged from closing holding a combined 16% of Zimmer Biomet, split four ways. Each sponsor's sell-down was constrained by the others' trading plans — Blackstone was still a 10%+ holder into February 2016. For capital that was supposed to be "returned" at the June 2015 close, the actual full-cycle DPI (distributions to paid-in) extended months beyond.
• Governance drag during the hold. Four GP partners representing four different funds on a single board slows every operating decision that requires unanimity — debt refinancings, management changes, capital allocation. The Biomet board didn't publicize fights, but the fact that the first material cash recap didn't happen until 2012 (five years into the hold) suggests the consensus-building was expensive.

What the Biomet case teaches

A few things stay with you after reading the Biomet filings end to end:

Entry multiple compounds forward relentlessly. Buying any business at a late-cycle peak with 1.2x of your equity on top of 4-5x of debt means the exit multiple needs to be comparable to the entry multiple just to clear a modest MOIC. For eight years of a four-sponsor consortium's collective attention, "modest" is not what the LPs are paying 2-and-20 to fund.

Strategic acquirer exits aren't exits — they're transformations. Taking Zimmer stock meant that the sponsors' MOIC depended on where Zimmer traded during the full sell-down window, not where it printed on announcement day. The $105 price pop was the gross markup at headline; the realized number depended on 2015-2016 Zimmer trading levels and sell-down execution.

Club deals at mega-scale are self-defeating in a stuck hold. The industry didn't abandon club deals because of the antitrust investigations alone. It abandoned them because asymmetric distress — one GP's fund life ending before another's, one GP's LP base getting restless before another's, one GP's valuation methodology diverging from another's — makes a stuck mega-LBO much slower to work through with four partners than with one.

The Biomet / Zimmer merger closed as a technical success: capital was returned, LPs got their DPI, Zimmer Biomet became a $45 billion-market-cap orthopedics leader. But it's the quiet case study every mid-career PE investor references privately when they explain why they'd rather be a sole sponsor on a $2 billion deal than one of four on an $11 billion deal.

What this looks like in a real model

The All-in-One PE Model handles multi-sponsor equity checks as separate tranches with independent ownership stakes, waterfall participation, and exit cash flows — exactly what a four-partner club deal with pro-rata governance and distribution requires. Run a sensitivity on exit multiple × exit year to see what a stuck 2013 mark would require from the eventual 2015 exit to clear a specific MOIC hurdle, and the model surfaces both the gross consortium return and the per-sponsor DPI. See the LBO sheet preview before buying.

The Biomet deal didn't break — but barely clearing cost of capital over nearly eight years is a reminder that in PE, the entry decision is the most consequential thing a sponsor does, and that one more sponsor in the room doesn't fix a price that was aggressive to begin with.

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Sources:

1. Biomet, Inc., SC14D9C — merger agreement press release (Dec 18, 2006), SEC EDGAR
2. Biomet, Inc., 8-K — $46/share price-bump announcement (June 2007), SEC EDGAR
3. Biomet, Inc., SC TO-T — tender offer statement (June 2007), SEC EDGAR
4. Biomet, Inc., Form 10-K for fiscal year 2007 — revenue and operating income detail, SEC EDGAR
5. Biomet, Inc., Form 10-K for fiscal year 2012 — long-term debt and 2012 refinancing detail, SEC EDGAR
6. Zimmer Holdings, Inc., Form 424B3 — merger prospectus (2014), SEC EDGAR
7. Zimmer Holdings, Inc., Form 10-Q (Q2 2014) — merger agreement disclosure and expected financing, SEC EDGAR
8. Zimmer Biomet Holdings, Inc., Form 10-K for fiscal year 2015 — aggregate consideration at close and per-share conversion detail, SEC EDGAR
9. Cleary Gottlieb, "Consortium of Investors in $11.4 Billion Acquisition of Biomet, Inc." clearygottlieb.com
10. Cleary Gottlieb, "Biomet in $13.35 Billion Merger with Zimmer" clearygottlieb.com
11. Simpson Thacher & Bartlett, "Represents Blackstone in $14 Billion Acquisition of Biomet by Zimmer Holdings" (June 25, 2015), stblaw.com
12. Private Equity International, "Biomet price tag grows to $11.4bn" privateequityinternational.com
13. MassDevice, "Ortho shakeup: Zimmer to acquire Biomet in $13.35B deal" massdevice.com