Smith & Nephew Not in Talks That May Lead to Offer

Smith & Nephew Plc, Europe’s largest maker of knee and hip replacements, said it’s not in talks that may lead to a takeover or merger after the Daily Telegraph reported the company was about to start informal negotiations with Biomet Inc.

Smith & Nephew rose 0.5 pence, or less than 0.1 percent, to 685 pence at the 4:30 p.m. close of London trading, giving the company a market value of 6.1 billion pounds ($9.7 billion). The stock pared a gain of as much as 4.6 percent.

“Smith & Nephew has a long-standing policy of not commenting on press speculation, unless there is a regulatory obligation to do so,” the London-based company said in a statement today. “However, exceptionally, Smith & Nephew wishes to clarify that it is not engaged in any discussions which could lead to a merger or a takeover involving the company.”

The Telegraph report was at least the third in the past five weeks that speculated the knee and hip replacement maker would be sold. Smith & Nephew rose the most in six years on Jan. 10 after Sky News reported the company rejected a 7 billion-pound bid from Johnson & Johnson because it was too low.

In a merger with Biomet, which is owned by a group of private-equity firms led by Blackstone Group LP, Smith & Nephew shareholders would get “the lion’s share” of the equity, the Telegraph reported late yesterday, without saying where it got the information. The companies plan talks on a possible 15 billion-pound merger, the newspaper reported.

Looking for Acquisitions

Bill Kolter, a spokesman for Biomet in Warsaw, Indiana, declined to comment. Helen Winning, a Blackstone spokeswoman in London, didn’t return a call seeking comment.

David Illingworth, Smith & Nephew’s chief executive officer, declined to comment on the Sky News report Jan. 10 at the J.P. Morgan Healthcare Conference in San Francisco. The industry will undergo some consolidation and Smith & Nephew will be looking for acquisitions, he said.

Illingworth and Biomet Chief Executive Officer Jeffrey Binder had planned to meet in New York next week to discuss overall industry issues, not to talk about a possible merger, said a person with knowledge of the situation. The meeting has been canceled, the person said. J&J has looked at Smith & Nephew but didn’t make a formal offer, said a second person with knowledge of the situation.

Financing, Debt

A combination of Biomet and Smith & Nephew would create the world’s second-largest orthopedics company behind Stryker Corp., according to report today by the Royal Bank of Scotland. A Biomet deal wouldn’t face the same antitrust obstacles as a sale to J&J, said Justin Smith, an analyst with MF Global UK Ltd. in London.

“From an antitrust perspective it’s more likely to go through, but there’s still a question about financing and debt,” MF’s Smith said in an interview today. He recommends selling Smith & Nephew shares. J&J would have to divest a significant amount of its business to appease authorities, which would “severely compromise the strategic rationale” of buying Smith & Nephew, he said.

Smith & Nephew held talks with Biomet in 2006 but lost out on a takeover of the implant maker to the Blackstone-led group, which also included KKR & Co., TPG and the private-equity arm of Goldman Sachs Group Inc.

Biomet had net debt of $5.7 billion as of Nov. 30, the company said in a Jan. 6 statement. The debt, incurred during the buyout, would have to be refinanced, Thomas Deitz of RBS wrote today.

Private Equity

The Daily Mail reported Dec. 8 that a U.S.-based private equity group was poised to make a cash bid worth 7.1 billion pounds, or 8 pounds a share, citing “industry gossip.” Goldman analysts said in a note the same day that the U.K. medical device maker is an attractive acquisition target.

Smith & Nephew’s diversification into non-orthopedic markets such as wound management and endoscopy products will likely lead to “above-average” sales growth in the medium term, Goldman analysts Veronika Dubajova and Mick Readey said in the note to investors.

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