Is Smith & Nephew in Play … Again?

Six months ago, industry and financial market speculation swirled about a takeover of London-based orthopedic firm Smith & Nephew. Kalamazoo, Mich.-based Stryker Corp. was rumored to be interested in Smith & Nephew plc which had annual sales in 2013 of $4.1 billion. The company’s market cap is about $15.2 billion.

Stryker officials denied on May 28 that they were planning to bid for their United Kingdom rival. The company was forced to respond to a request from Britain’s Takeover Panel, the agency in charge of monitoring deal activity, following an article in the Financial Times claiming that a deal was in the works. At the time, however, Stryker CEO Kevin Lobo admitted that the company had been exploring the possibility of a Smith & Nephew takeover.

Bloomberg reported that Stryker is discussing the financing of a deal and its potential antitrust hurdles with advisers, citing unidentified sources because the discussions are private. Smith & Nephew and its advisers are aware of Stryker’s interest, according to reports.

Stryker could still decide against the purchase, sources told Bloomberg. The deal would be structured as an inversion, which has received a lot of recent media and government attention as of late. Recent moves by the U.S. Department of the Treasury have sought to make such deals less attractive.

However, according to Bloomberg’s source, Stryker officials see “strong strategic reasons” to pursue a deal aside from tax advantages, and an inversion “wouldn’t be essential” to make the deal work.

According to a recent research noted from J.P. Morgan Chase & Co. analyst Michael Weinstein, a Stryker acquisition of Smith & Nephew could give Stryker’s earnings an immediate boost. If it bought Smith & Nephew at a premium of 30-35 percent to its current price tag of $36.12 per share, the deal could boost the merged companies’ cash earnings per share by 7-8 percent in 2016.

The buyout, however, also would have to pass antitrust muster.

A recent deal making orthopedic and financial headlines is hitting regulatory headwinds in Europe. European Union regulators have asked Zimmer Holdings Inc. to provide more information about its planned $13.4 billion purchase of Biomet Inc., questioning whether the deal would create “less innovation and higher prices,” according to a recent Wall Street Journal article.

Zimmer officials insist the deal will close in the first quarter of 2015, but it is still awaiting clearance. News of a Stryker bid for Smith & Nephew could influence regulators’ perception of the Zimmer-Biomet deal, Weinstein wrote.

Despite the mixed bag of pros and cons, the stock prices of both companies shot up on Monday, Nov. 24—Smith & Nephew rose as much as 10 percent (settling around 4 percent) and Stryker gained less than a point.

In May, Smith & Nephew completed the purchase of Texas-based ArthroCare for $1.5 billion.