Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News.

Can Elliott Management Corp. bag what has eluded the market and analysts for years?

Paul Singer's hedge fund has purchased a stake in London-based Smith & Nephew Plc, a $17 billion maker of artificial hips and knees, according to a report by my Bloomberg News colleagues Tuesday. The company, whose U.S.-listed shares jumped 7 percent on the news, has repeatedly topped analysts' annual lists of potential takeover candidates -- whether it be among health-care targets or even European companies more broadly. But acquisition offers, at least public ones, haven't been forthcoming for investors. 

Deal Lookout
Smith & Nephew's stock hit a record last month and its valuation is above historical levels. Even so, it's lagged behind its acquisitive, larger rival Stryker:
Source: Bloomberg

Lucky for them, Elliott has built a name in the particular flavor of activism that tends to induce acquisitions. Led by Jesse Cohn, Elliott's head of U.S. equity activism, the investment team has helped so many unappreciated stocks (mostly in the software sector) score attractive takeover bids that we even joked the firm should have a 1-800-ACTIVIST hotline.

We don't yet know what Elliott will be pushing for at Smith & Nephew exactly, and there are certainly data to support other more operational objectives. But one could also argue a sale to larger rival Stryker Corp.-- the long-speculated buyer for Smith & Nephew -- could also resolve many of the company's weak points.

Stronger Together
In a merger, Stryker and Smith & Nephew could probably cut costs and benefit from added scale in their markets
Source: Bloomberg

Smith & Nephew's operating margin has narrowed some in the last few years, and following two years of nearly flat sales, revenue growth is still set to trail that of Stryker, which has been aided by strategic acquisitions to increase market share. I quickly ran the numbers on a hypothetical transaction between Stryker and Smith & Nephew: Without letting Stryker's net leverage ratio go above 3, and assuming a 25 percent premium and at least $50 million of synergies, Stryker could fund a third of the deal with cash and the rest in stock and it would be immediately accretive to earnings. Plus, Stryker would be able to expand its footprint in knee and hip replacements as the population ages, as well as in sports medicine and emerging markets. 

Up for Grabs
Smith & Nephew, which has launched a robot to compete with Stryker's for surgeries, offers its rival a chance to pick up a greater share of the orthopedic-devices market
Source: Smith & Nephew presentation Note: Takes midpoint of ranges cited by company. No advanced wound management data was provided for Stryker, but that doesn't mean the company doesn't have a share of the market.

Elliott also arrives as Smith & Nephew prepares for a change at the top. Just this week, the company announced that CEO Olivier Bohuon (who was diagnosed with a "highly treatable" cancer last year) is planning to step down by the end of 2018 and that the board is beginning to search for his replacement. Bohuon said this provides "ample time to identify a successor and ensure a smooth transition."

It's also ample time to negotiate a deal. Could our horoscope for Bohuon prove correct -- is this finally his year to sell Smith & Nephew? Or has Elliott met its match?

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net