Did Smith & Nephew receive a bid of more than 750p a share from Johnson & Johnson before Christmas?
The unsatisfactory answer after a weekend of frenzied speculation (and a big run-up in the S&N share price on Monday morning) is that we still don’t know.
There has been no statement from the company.
And this situation is threatening to make a mockery of the rules that govern takeovers in the UK.
Surely after today’s spike and the strong performance of S&N in the weeks before Christmas, the Takeover Panel should force the company to clear up the confusion. S&N might not like it but there’s a real risk of a false market developing in it shares. And this is not a difficult mystery to solve. Either the company did receive an approach or it didn’t.
As an aside, it’s also worth noting that S&N uses the same PR team (Brunswick) as De La Rue, another company that refused to disclose a takeover approach in spite of a rising share price and bid rumours.
But let’s put all that to one side for the moment and assume that J&J did have an offer rebuffed, what might happen next?
Well, a deal between two leading orthopaedic implant manufacturers makes a lot of sense says Merrill Lynch …
As Biomet’s weak orthopaedic results for 2QFY11 (6th January) highlighted, the fundamental outlook for the US and European orthopaedic markets remains challenging. As reimbursement pressure increases in both the US and Europe, greater negotiating power and a strong and differentiated product offer are vital. The companies would also be able to extract synergies from SG&A costs and central functions, as well as leveraging JNJ’s larger sales force to increase sales of Smith & Nephew’s strong hip and knee product offering.
… but would face potentially significant regulatory hurdles.
Analysts estimate that S&N has around 12 per cent of the global hip and knee reconstruction market. Once combined with J&J’s DePuy business it would have a 35 per cent global market share in hips and knees.
S&N is also big in arthroscopy — around a third of the global market according to Merrill. J&J is much smaller but combined the two would have 40 per cent of this market. All of which is likely to give competition authorities on both sides of the Atlantic pause for though.
Based on recent deals in the sector, S&N would probably want at least 800p share, reckons Merrill:
A price of 800p would imply a 2010E sales multiple of 3.0x and 9.6x 2010E EBITDA (Equity/EBITDA: 9.2x). At 750p, a potential offer would imply 2.8x 2010E sales and 9.0x 2010E EBITDA. We would note that an offer of 800p would imply a market cap of $11.1bn. At 3Q10, JNJ had net cash of $10.1bn. We note that private equity acquired Biomet in 2007 for 5.4x trailing 12 months sales and Smith & Nephew itself paid 3.0x for European peer Plus Orthopaedics (also 2007). Zimmer paid 4.4x for Centerpulse in 2003. However the underlying growth outlook for the orthopaedic market has deteriorated materially since these deals were completed.
So is there any chance of someone else entering the fray? Biomet, a private equity rival, has been touted as a potential merger partner for S&N in recent weeks.
Investec Securities says yes:
If a formal approach is made, we would expect both Stryker and Zimmer to have a long hard look as, strategically, they are likely to be concerned about J&J gaining an edge on them in terms of orthopaedics market share. However, neither have anything like J&J’s firepower (Stryker is capitalised at US$21bn and has net cash, Zimmer is capitalised at US$10bn and has only a small net cash position). We may also see Smith & Nephew seeking out a white knight approach from Biomet / Synthes or possibly private equity, but it is hard to see how any of these could outbid J&J.
Indeed, they don’t have the firepower of J&J. The US drug company is capitalised at over $170bn and has net cash of $10.1bn. Coincidentally, at 800p, S&N would be valued at $11.1bn.
Update: 9.54am. Still no statement and S&N shares up now up 12 per cent at 727p.
While we wait for some comment from the company here is the thinking of Olivetree Securities on takeover speculation.
The press broadly reported this weekend that Smith & Nephew rejected a 750p bid from Johnson & Johnson before Christmas. Allegedly the offer was rebuffed as it “substantially undervalued” the company. JNJ is reported to be considering whether to come back with a higher offer at present.
750p represents 15x 2011 PE and 7.9x EV/EBITDA – by way of comparison, Zimmer trades on 11x and 6x respectively and Stryker is on 15x and 7.5x.
Worth noting that there would be significant anti-trust hurdles for JNJ to acquire S&N, there are significant overlaps in areas such as knee and hip implants. Given how expensive any S&N deal would be, a transaction would likely be reliant on synergies to make the mathematics work – with sizable disposals it is likely these benefits are eroded significantly. It should be remembered though that there are material central cost synergies to potentially takeout of S&N, reducing the central admin costs would be easy for a player such as JNJ. Whereas we think it is indeed likely that something is afoot regarding S&N, the path to completion is a complicated one, and the shareprice should reflect this. We also wonder why we have not yet seen clarification from either party.
And so do we.
Related link:
S&N risks investor anger over takeover offer – FT Alphaville