Brean Capital Cashes Out Of Zimmer Holdings, Downgrades Stock On 'Uncertainty'

In a report published Thursday, Brean Capital analyst Jason Wittes downgraded the rating on

from Buy to Hold. The analyst expects uncertainty regarding the company's performance to persist for the next several quarters, which would keep the stock range bound, at best. Zimmer Holdings announced on Wednesday that it had received FTC clearance for its acquisition of Biomet, while reiterating its EPS guidance for 2015, as well as the expected accretion from the acquisition in the first 12 months of transaction closing. The analyst expects the accretion and synergies from the acquisition to be back-end loaded, with synergies adding at least $1.50-$1.60 to the EPS in 2016. "Synergies are expected to be $135 million in the first 12 months, reaching $350 million by year 3. This was raised from $270 million in expected synergies, which was announced during the first quarter conference call, to help cover the slack from delayed close and greater FX and tax impact," Wittes said According to the Brean Capital report, "So far our checks indicate that management has done a good job of keeping the sales force together, although with the deal closed, that is likely to change. We note that the large joint companies have a better record of maintaining sales force and share in hips and knee's post-merger than with spine and extremities. This is likely due to the limited number of players, and locking up talent with contracts—which we believe ZMH has done." However, the analyst expects changes to take several quarters to be implemented, which implies continued risk. In addition, Zimmer Holdings is also expected to undertake divestures worth $100 million, with dis-synergies worth $100 million.