J&J Premium Signals $15.6 Billion for Smith & Nephew: Real M&A

Smith & Nephew Plc, which gained 16 percent on takeover speculation, is still worth almost 60 percent more, or $15.6 billion, in an acquisition.

Companies in the past decade have offered to buy medical- products makers at a median of 12.7 times trailing 12-month earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg. The multiple would value Smith & Nephew’s equity at $15.6 billion, based on Ebitda of $1.28 billion that analysts project Europe’s biggest maker of knee and hip replacements will have this year. That’s 57 percent higher than its average market value in the past 20 days.

A purchase of Smith & Nephew at that price would be among the industry’s most expensive. Only Johnson & Johnson, the world’s largest health-products company, and General Electric Co., the biggest maker of medical-imaging equipment, did deals at prices that high in the past decade. J&J, which had a second year of declining sales, has looked at buying Smith & Nephew, a person familiar with the plan, who declined to be identified because the discussions were private, said last month.

“Any acquirer will likely need to pay up” for Smith & Nephew, said Keith Wirtz, who oversees $18 billion as chief investment officer for Fifth Third Asset Management in Cincinnati, and has more than 28 years of experience in the financial industry. “The acquirers would be limited. You’re going to see names like J&J and others who might find they can instill some energy in the business.”

Attractive Target

Wirtz, who owns Smith & Nephew shares, said a premium of 30 percent to 50 percent would be necessary in an acquisition.

Smith & Nephew has climbed 16 percent since the Daily Mail reported on Dec. 8 that a U.S.-based private equity group was set to make a takeover bid and Goldman Sachs Group Inc. said the London-based device maker was an attractive target. The shares gained 0.5 percent to 706.5 pence today in London.

The speculation has boosted Smith & Nephew’s market value by 861 million pounds ($1.39 billion) to 6.26 billion pounds. At the historical takeover multiple of 12.7 times Ebitda, a deal may cost as much as 10 billion pounds including Smith & Nephew’s net debt, based on analysts’ earnings estimates for 2011, according to data compiled by Bloomberg.

That would mean a purchase price of 1,087 pence for each of Smith & Nephew’s 890.6 million common shares, a 57 percent premium to its 20-day average of 691.4 pence. The same premium from the average prior to Dec. 8 would represent a per-share offer of about 928 pence, or 32 percent above yesterday’s closing price of 703 pence, data compiled by Bloomberg show.

‘Finite Pool’

“There’s only a finite pool of companies out there that would be receptive to this kind of price,” said Sachin Shah, a special situations and merger arbitrage strategist at Capstone Global Markets LLC in New York. “The pool is small, but that is not necessarily an obstacle for getting a deal done.”

J&J doesn’t comment on “rumor or speculation,” Jeffrey Leebaw, the New Brunswick, New Jersey-based company’s spokesman, said in an e-mail yesterday. Jon Coles, a spokesman for Smith & Nephew at Brunswick Group in London, also declined to comment.

J&J may need to pay about 1,000 pence a share to acquire Smith & Nephew because of the potential costs savings for the combined company, Yi-Dan Wang, an analyst for Deutsche Bank AG in London, said in a report to clients dated Jan. 10. Wang recommends buying shares of Smith & Nephew.

Navid Malik of Matrix Corporate Capital LLP in London, who also recommends the stock, said a bid may be as high as 1,060 pence, based on a multiple of 3.5 times this year’s sales.

Paying the biggest premiums for medical-products companies hasn’t always led to outsized returns for buyers.

GE, J&J

In April 2004, Fairfield, Connecticut-based GE completed a $10.9 billion takeover of Amersham Plc, the world’s largest maker of injectable dyes used in medical-screening machines, in what was GE’s biggest ever acquisition.

The 63 percent announced premium in the stock deal, which included the assumption of debt, for Little Chalfont, England- based Amersham was the second-largest in the industry’s history.

GE advanced 14 percent in the first year after the takeover, in line with the 12 percent gain for industrial companies in the Standard & Poor’s 500 Index.

J&J’s purchase of Santa Barbara, California-based Mentor Corp., a maker of breast implants, in January 2009 was struck at a 101 percent premium, the highest for any medical products acquisition of $1 billion or more in the past decade.

Shares of J&J rose 11 percent in the first year after the Mentor takeover, about half the gain for U.S. health-care companies. The S&P 500 climbed about three times as much.

J&J was little changed at $60.67 at 1:38 p.m. today in New York Stock Exchange trading.

‘Significant Costs’

A deal for Smith & Nephew would add to J&J’s earnings in the first year, Jack Scannell, a London-based analyst at Sanford C. Bernstein & Co., said in a report to clients dated Jan. 18.

Last week, J&J posted a decline in fourth-quarter profit and forecast 2011 earnings that were below analysts’ estimates because of “significant costs” from product recalls.

Chief Executive Officer William Weldon said in a conference call on Jan. 25 that J&J is interested in acquisitions to expand in emerging markets and provide treatments such as joint problems, diabetes and cardiovascular disease.

Smith & Nephew’s sales in Asia, Latin America and Africa have increased 50 percent in the past three years, and accounted for 25 percent of revenue in the third quarter, according to data compiled by Bloomberg.

“J&J looks like a natural buyer because they have some challenges,” Fifth Third Asset’s Wirth said. “The industry is sorting things out and there’s going to be some accelerating growth in sight for Smith. For anyone who wants to acquire the company, there’s going to be recognition of that potential.”

The Dealmakers

Goldman Sachs has provided financial advice on J&J’s two biggest deals -- the $16.6 billion purchase of Pfizer Inc.’s consumer health-care unit in 2006, and the $12.9 billion takeover of Alza Corp. in 2001, Bloomberg data show. Smith & Nephew used UBS AG as its financial adviser in its $883 million deal for Plus Orthopedics Holding AG in 2007.

An offer by J&J may draw scrutiny from antitrust regulators, according to Bernstein’s Scannell, who says J&J isn’t likely to bid “much higher” than 800 pence a share.

“It’s not out of the question or crazy to expect a large premium on a deal,” said Maria Mendelsberg, a money manager with Denver-based Cambiar Investors LLC, which oversees more than $5.5 billion. “However, the acquirers are limited. I don’t know who the buyer would be other than a J&J or possibly a private equity group that could do a deal of that size.”

Citigroup, EMI

Elsewhere in mergers and acquisitions, Citigroup Inc. seized control of EMI Group Ltd. yesterday after the record label struggled to meet the terms of loans used to finance its takeover by Guy Hands.

The New York-based bank, which funded Hands’s takeover in 2007, will own all of EMI after the debt-for-equity swap, the company said in a statement. The deal will reduce London-based EMI’s debt by 65 percent to 1.2 billion pounds.

Dish Network Corp., the second-largest U.S. satellite- television provider, agreed to buy DBSD North America Inc. for about $1 billion, after fighting the satellite company’s bankruptcy plan in court. Dish will also provide DBSD with a non-revolving $87.5 million loan, according to a statement from the Englewood, Colorado-based pay-TV provider yesterday. The $1 billion includes interest accruing on DBSD’s debt.

Valeant Pharmaceuticals International Inc. of Mississauga, Ontario, said it will acquire Zug, Switzerland-based PharmaSwiss SA for 350 million euros ($480 million) to expand in Europe.

Time Warner Cable Inc. of New York agreed to buy NaviSite Inc. for $274 million, including debt, as the second-largest U.S. cable-television operator expands into services that will let businesses store data online. The deal, which values Andover, Massachusetts-based NaviSite at $5.50 a share, represents a 33 percent premium to its closing price yesterday.

There have been 2,108 deals announced globally this year, totaling $175.9 billion, a 17 percent increase from the $149.7 billion in the same period in 2010, according to data compiled by Bloomberg.

To contact the reporters on this story: Michael Tsang in New York at mtsang1@bloomberg.net; Allison Connolly in Frankfurt at aconnolly4@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Phil Serafino at pserafino@bloomberg.net.

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