FTC decision paves way for merger?
PDF attached
We believe the time may be right to re-visit our pre event buy Smith Nephew recommendation.
Our note shows why Stryker is the best buyer for Smith Nephew. The merger has been rumoured for some time. Investors believe this would be a good deal for both companies (as one can see from share price reaction). Further, SN financial performance has seen them beat FY EPS estimates where Stryker’s own EPS results did not. If the market is supportive of a tie up and the target’s financial results have not deteriorated then perhaps a reason for the lack of engagement until now is execution risk- Antitrust?
Yesterday’s FTC divestment order in relation to Zimmer/Biomet may allow for Stryker/SN to have further clarity as to just how their own merger could go ahead. See here: https://www.ftc.gov/news-events/press-releases/2015/06/ftc-requires-medical-device-company-zimmer-holdings-inc-divest
One particular area of interest is Knee implants. Our note shows SN largest segment by revenue is Knees as it is also for Stryker’s Reconstructive segment.
The FTC order “requires Zimmer to divest to Smith & Nephew the U.S. intellectual property, manufacturing technology, and existing inventory relating to its unicondylar knee implant, and to provide transitional services to help them establish manufacturing capabilities and secure necessary FDA approvals”.
This means, SN becomes a stronger Knee competitor to Stryker, thus increasing the rationale for Stryker to buy SN.
Our note shows, that combining SN and Stryker may be seen as pro competitive by the FTC as the market which now has 2 strong Knee device providers and 2 weak providers would become a market with 3 strong Knee device players.
We review our SN valuations but do not increase assumptions. We think they are conservative because SN FY results showed earnings beat analyst estimates. We thus believe a bid near 1350p may get SN to the table. 20pct upside from current share price.
To the downside we note that SN is already trading 6pct below fair value estimates of 1185p.
Details in the PDF attached
Stryker (SYK) for Smith&Nephew (SN/ LN)