Does Medtronic’s Match With Covidien Leave Smith & Nephew Solo?

Smith & Nephew SN.LN -0.09% PLC has missed out on the bouquet again. Shares in the London-listed, Dublin-based maker of replacement joints dipped around 2%  in morning trading Monday, after U.S. pacemaker specialist Medtronic Inc.MDT -2.77%said it was buying Smith & Nephew’s Dublin-based rival Covidien COV +19.20%PLC for $42.9 billion.

That removes a potential suitor for Smith & Nephew, which as a small player in a consolidating market has long been touted as a takeover target. Shares in the artificial joint maker have risen more than 20% this year on rumors of takeover interest, and with Medtronic out of the picture, the field has narrowed.

Still, Medtronic wasn’t the only eligible match. Stryker Corp.SYK +1.46%—another U.S. artificial-joint manufacturer—said last month it was in the preliminary stages of evaluating a deal for Smith & Nephew but didn’t intend to make a formal offer. Under U.K. takeover rules, Stryker is now prevented from making a bid until November, but can return sooner if a rival bidder emerges.

A number of companies that were looking at a deal to buy S&N rival Biomet Inc., whichZimmer Holdings Inc.ZMH -0.22% bought in April, are now reviewing other opportunities in the sector, said one senior health-care banker.

The Medtronic deal highlights Smith & Nephew’s possible tax advantages. Smith & Nephew’s U.K. listing could make it attractive for a U.S. firm looking to use cash trapped offshore, and to pursue a so-called inversion deal to relocate in a country with a more favorable corporate tax rate, as Medtronic is doing.

The top 10 U.S. medical-technology firms are sitting on around $63 billion in cash and short-term investments, much of which is likely offshore, Berenberg estimates.

The attractiveness of inversion deals has risen after the European Union said it was investigating ways in which U.S. firms use practices like transfer pricing—another way companies can sidestep high U.S. corporate taxes—to lower their tax burden.

Still, Smith & Nephew’s own 28.9% tax rate shows that such a move may be tricky for a buyer to achieve. And at 20 times next year’s forecast earnings, around a 33% premium to its orthopedic peers, its shares are still pricing in a lot of interest.

“SN’s premium valuation is currently supported by M&A,” Morgan Stanley analyst Michael Jungling said in a note to clients Monday, noting that it is rare for Smith & Nephew to trade at a premium to peers on a sustainable basis. Its investors still hear wedding bells ahead.




Josh Sandberg

Josh Sandberg is the President of Ortho Sales Partners and Partner for The De Angelis Group. He also serves as Co-Founder and Editor of OrthoSpineNews.

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