Smith & Nephew Gains on Report of $10.9 Billion Bid
Johnson & Johnson Headquarters in New Jersey
Emile Wamsteker/Bloomberg News
Johnson & Johnson headquarters in New Brunswick, New Jersey.
Johnson & Johnson headquarters in New Brunswick, New Jersey. Photographer: Emile Wamsteker/Bloomberg News
Smith & Nephew Plc rose the most in more than six years in London trading after Sky News reported the U.K. maker of hip and knee replacements rejected a 7 billion-pound ($10.9 billion) takeover approach from Johnson & Johnson several weeks before Christmas.
David Illingworth, Smith & Nephew’s chief executive officer, declined to comment on the report in remarks today at the J.P. Morgan Healthcare Conference in San Francisco. “Speculation has been going on for 10 years,” he said at the meeting.
The orthopedic industry will undergo some consolidation, Illingworth said, and Smith & Nephew will be looking for purchases that add to its current business line. Consolidation is likely to raise antitrust issues, he said.
J&J would potentially have to divest assets to avoid antitrust issues with the U.S. Department of Justice, wrote Justin Smith, an analyst at MF Global UK Ltd. in London, in a note to clients. As a result, the list of potential acquirers is “neither long nor obvious,” he said.
“The scale of divestments which would be required to appease the DOJ would severely compromise the strategic rationale” of the deal, Smith said.
Smith & Nephew closed up 62 pence, or 9.5 percent, at 712 pence at 4:35 p.m. after gaining as much as 14 percent. It was the biggest gain since Nov. 4, 2004. The stock has returned 4.4 percent in the past year before today including reinvested dividends, trailing the 19 percent return in the Bloomberg Europe Health Care Index.
Board Rejection
J&J made an indicative offer of more than 750 pence a share, Sky News City Editor Mark Kleinman wrote Jan. 8 on his blog. That’s more than 15 percent above Smith & Nephew’s closing share price of 650 pence on Jan. 7. The board rejected the proposal because it “substantially undervalued” the London- based company, Kleinman wrote, without saying where he got the information.
J&J has been evaluating whether to return with a higher offer, Sky News said. There’s no certainty it will, according to the report. U.S. device makers Stryker Corp. and Zimmer Holdings Inc. may be interested in making approaches for Smith & Nephew, Sky News said.
Antitrust Issues
There may be antitrust issues if J&J, Stryker or Zimmer bid for Smith & Nephew, Lisa Clive, an analyst at Sanford C. Bernstein in London, said today in an interview. She said a tie- up with Biomet Inc., a Warsaw, Indiana-based implant maker, is more likely.
Jon Coles, an external spokesman for Smith & Nephew at Brunswick Group, declined to comment on the Sky News report when contacted by Bloomberg News. A call to internal spokeswoman Liz Hewitt wasn’t immediately returned. Marc Monseau, a spokesman for New Brunswick, New Jersey-based Johnson & Johnson, also declined to comment.
Smith & Nephew may fetch as much as 1,057 pence in a takeover, based on prices paid in previous deals, said Navid Malik, an analyst with Matrix Corporate Capital LLP in London. A 750-pence offer appears “opportunistic” because sales of orthopedics such as joint replacements -- which contributed 56 percent of Smith & Nephew’s 2009 revenue -- have slowed, Malik said. The company’s two other business units are endoscopy, or equipment used in minimally invasive surgery, and products to treat hard-to-heal wounds.
Focus on Orthopedics
“Most people have been focused on orthopedics, and Smith & Nephew has been devalued for it,” Malik said in a telephone interview yesterday. “Endoscopy and wound care are highly attractive, particularly with the growing diabetes market.” He recommends buying the shares.
Before today, the shares were valued at 13.3 times expected earnings, compared with an average of 18.4 times for other makers of health-care equipment and supplies.
J&J has operations in orthopedics, endoscopy and wound care, unlike other device companies, making Smith & Nephew a good fit, Malik said.
A buyout of Smith & Nephew would be “strategically uninspiring” because it would not add any “standout strategic assets” to J&J’s product lines, Derrick Sung, an analyst at Sanford C. Bernstein & Co. in New York, said in a note to investors today.
Orthopedics sales rose 1 percent in the third quarter, compared with 6 percent growth in wound management and a 3 percent increase in endoscopy revenue, Smith & Nephew said Nov. 5. Younger patients are putting off having operations because they don’t want to take time off work, Illingworth said.
To contact the reporter on this story: Allison Connolly in Frankfurt at aconnolly4@bloomberg.net; David Olmos in San Francisco at dolmos@bloomberg.net; Sasha Damouni in New York at sdamouni2@bloomber.net;
To contact the editors responsible for this story: Phil Serafino at pserafino@bloomberg.net Reg Gale in New York at rgale5@bloomberg.net
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