Here we go again…
Friday’s Daily Telegraph:
US orthopaedics giant Biomet is set to begin informal talks with Smith & Nephew (S&N) about a potential £15bn merger….
However, because of the levels of debt attached to Biomet – $5.9bn – a cash acquisition would not be possible, creating the need for a highly complex merger structure. Although no formal offer has been made, both sides have been examining the possible structure on the table.
Now this idea — a sort of reverse takover of S&N — has been kicked around by bankers for a few months.
Indeed, the FT’s M&A editor Lina Saigol was writing about it a month ago:
The question, however, is not whether Biomet wants S&N, but whether it can afford it.
With $6bn of debt still sitting on its books, raising enough cash to do a deal in this environment would be challenging, if not impossible.
A smarter solution might be to structure the deal as a reverse takeover. S&N could pay for the deal with shares, and launch a rights issue to finance the deal.
To pay down debt, it could then sell non-core assets, such as the wound management division that has seen slow growth. That would provide a partial exit for the buy-out consortium and aid their next round of fundraising.
Unfortunately the transaction doesn’t really stack up, as Olivetree Securities noted earlier this week:
Any deal with Biomet would require the latter’s private equity shareholders to double or quit – they have lost nearly 100% of their equity in Biomet to date. Any S&N deal would either see this group injecting a new large block of equity to buy S&N, or selling out to S&N for a 100% loss. Either scenario is unlikely.
That’s not to say it wasn’t considered in the wake of J&J’s approach to S&N in December as a possible defence. But just that the terms would have to be so favourable to S&N, that it’s hard to see this deal ever taking flight.
Still one should never say never.
RBS reckons it could work:
We believe a merger between the two companies would make strategic sense and create significant cost synergies in purchasing, manufacturing, SG&A, etc.
Biomet’s relatively large debt pile would need to be refinanced. On our calculation, the combined leverage of the merged company would be around 3x net debt/ EBITDA
The combined company would become the world number two in the global orthopaedics market, with 14% market share (after Stryker, with 15% and before J&J, with 13%). It would become the world number two in hip and knee reconstruction (c23% market share, after Zimmer with 24%) and number three in Trauma, with a 13% market share (after Synthes with 50% and Stryker, with 20%). Anti-trust issues are likely in some jurisdictions, in our view.
Anyway, the wider point is that S&N remains firmly on the M&A watch list. It’s highly likely that Europe’s largest maker of replacement knees and hips will be involved in a transaction this year.
Indeed, it wouldn’t be a huge surprise if Johnson & Johnson returned with a higher offer. And this time, someone might actually disclose the approach. Then gain.
Anyway, here’s the price action in S&N (which has not commented on the Telegraph story) this morning.
Updated: 13.14pm (GMT).
Okay we are totally and utterly confused. According to Telegraph S&N had just admitted its CEO was due to meet his opposite number at Biomet next week but not to discuss a multi billion pound deal.
Smith & Nephew has been forced to admit that its chief executive was due to meet his opposite number at US rival Biomet amid speculation over a possible £15bn merger.
The meeting has now been cancelled after the company issued a terse stock exchange statement claiming it was not “engaged in any discussions which could lead to a merger or a takeover involving the company”.
Despite S&N’s rocketing share price and relentless takeover speculation, a company spokesman insisted that the two chief executives were meeting simply to “shoot the breeze over industry issues”.
David Illingworth and Jeffrey Binder were set to meet in New York next week.
The spokesman also admitted that advisers for Biomet had “approached the company” but insisted that this was a normal state of affairs at S&N. He claimed that despite having received the approach Mr Illingworth had expressly committed not to discuss the multi-billion merger proposal with Mr Binder.
Normal state of affairs! We’ve forgotten what that’s like where UK takeovers are concerned. Perhaps Biomet might like to clarify what the hell is going on.
Update II: 14.02 (GMT).
An M&A broker who has been following this story has drawn the following response from the Comms team at S&N.
Spoke to the company’s communications team… they say the Telegraph article is “confused”. There has been no approach from Biomet as far as they are aware. The meeting between the CEOs of Bioment and S&N was to discuss the industry in general – they have not met before. The meeting has now been cancelled – no reason given. The Telegraph called S&N’s communications team last night to inform them of their article claiming merger talks with Biomet and were told last night that S&N’s communications team had no knowledge of any discussions.
So there was going to be a meeting but just to discuss the industry in general. Now think about the wording ‘the industry in general’. That can cover a lot of topics including, we presume, consolidation.
But if this was all so innocent, while cancel the meeting? The charitable answer is that S&N doesn’t want another week of bid speculation.
Related link:
S&N’s silence sparks disclosure debate – FT