Will Smith & Nephew Finally Be Sold in 2018?
Robin Young • Tue, October 24th, 2017
According to London’s equity traders, 2014 was absolutely the year that Stryker (SYK) was going to buy Smith & Nephew (SNN). Then they said it would certainly happen in 2015. And again in 2016.
So far, no sale.
A new report from one of Wall Street’s premier analysts, Mike Matson with Needham, offers up some new reasons why, maybe, 2018 might be THE year.
Matson points out that CEO Oliver Bohuon will be retiring by the end of 2018 and that an activist hedge fund manager—Paul Singer—has set his sights on the venerable London-based wound care and orthopedic supplier.
With record high stock prices and low cost debt—could Smith & Nephew’s board of directors come to the realization that this is “top dollar” time for Smith & Nephew?
Matson may well be on to something.
Ranking Smith & Nephew’s Potential Suitors: Stryker, Medtronic and DePuy Synthes
Hunting for revenue growth in a slow growing, mature industry—which orthopedics is—fosters the urge to merge.
First among equals in the rumored Smith & Nephew chase is Stryker.
As Matson writes in his report to clients on October 17: “For SYK, an acquisition of SNN would increase SYK's scale, market share, international presence, and would be significantly accretive to its earnings.” Adding SNN’s hip and knee implant lines would make Stryker the second largest supplier of large joint implants and systems.
According to Matson, with SNN, Stryker would be the largest supplier of hip replacement systems and number two in knees. Of course, Stryker would also be acquiring SNN’s line of recon robots which compete ferociously with Stryker’s MAKO robots.
In sports medicine, SNN would make Stryker #1. It would also shore up its #2 position in trauma and would give Stryker a #2 position in advanced would care.
Matson estimates that buying SNN could be accretive to cash earnings per share to the tune of about 9%.
Surprisingly, Matson offers up Medtronic (MDT) as the next most logical buyer.
In his view; “For MDT, an acquisition of SNN would increase MDT's scale, product breadth, and would be modestly accretive to its earnings.”
Medtronic already has a toe in the large joint recon waters with a very modest product offering in the U.S. and much larger presence in China. But with Smith & Nephew, Medtronic would be #4 in both hips and knees, #2 in sports medicine, #4 in trauma and #2 in advanced wound care.
As Matson points out: “MDT has minimal overlap with SNN, we think cost synergies are likely to be smaller than with SYK. We conservatively estimate that MDT could see 3% accretion to its cash EPS in 2019 assuming the acquisition closed in 2018.”
Matson dismisses the possibility that JNJ’s DePuy Synthes unit would have an interest in Smith & Nephew.
“We think JNJ is unlikely to pursue SNN since it is already overexposed to orthopedics, there could be antitrust issues in trauma, and it faced challenges with its last large orthopedics deal (Synthes). JNJ's Orthopedics business accounted for 37% of its Medical Devices sales in 2016 and it already has top two positions in the recon and trauma markets. In trauma, we estimate that JNJ's share is 42% and SNN's share is 8% putting their combined share at 50% which may draw concern from regulators.”
Matson’s final point is that both Stryker and Medtronic have billions of dollars trapped outside the U.S. Buying London-based Smith & Nephew would provide a handy use for that cash.
Elliott Management – Shaking Value Out of Sleepy, Slow Growth Companies
Paul Singer’s Elliott Management has about $23 billion under management. More than one-third of Singer’s portfolio is concentrated in distressed companies. He is what is often referred to as a Vulture Fund.
Singer’s track record of challenging corporate managements as a tactic to squeeze value out for shareholders is legendary. Here are just a few of his most notable fights.
- Wella AG – after two years of court battles, Singer forced P&G to increase its offer for this German hair products company.
- Shopko – Dissident shareholders, Singer among them, forces a private equity firm to raise its price for Shopko from $24 per share to $29 per share.
- Adecco – Adecco tried to buy DIS AG for €54.5 per share. Singer and other activist shareholders fought it and forced Adecco to raise the price to €113 per share.
- Hess – Singer criticized management for its use of capital and being distracted from oil exploration by other activities. Singer specifically called on Hess to sell certain assets and vote for new directors. Hess agreed to make the changes.
When Singer looks at Smith & Nephew does he see one of the premier orthopedic companies buried within a wound care firm?
As Matson said so well: “We believe the two events (Bohuon retiring and Singer investing) might be related and that they likely signal that a change in strategy that could include selling the company.”