Ros Snowdon
Deputy City Editor
SMITH & NEPHEW has held preliminary talks with United States rival Biomet about a deal which could propel S&N into the big league against major names such as Johnson & Johnson, Stryker Corp and Zimmer Holdings.
Speaking yesterday as the group announced third-quarter earnings in line with forecasts, S&N's chief executive Chris O'Donnell said: "Biomet is an innovator in orthopaedics. We are interested in innovative companies, large or small."
But he added that it would be difficult for two big orthopaedics companies to find the synergies to make such a deal worthwhile.
Any deal would have little effect on S&N's 1,000-plus workforce in Hull who work in the group's Wound Management division.
S&N has three divisions – Orthopaedics, which makes artificial joints; Wound Management, which makes enzymes to eradicate dead tissue and compounds to kill bacteria; and Endoscopy, which makes instruments for keyhole surgery.
Analysts said any tie-up between the two companies would most likely take the form of S&N making an offer for Biomet.
S&N closed the day down four per cent, a fall of 21.5p to 488p, on worries that any deal would have to be funded by new shares, which could dilute earnings for existing shareholders in the short term.
The two companies are understood to have held talks over the summer, but no offer was forthcoming.
Biomet is thought to also have held talks with the private equity arm of JP Morgan
Biomet has a similar market value to S&N's £4.8bn estimated worth. It is headquartered in Indiana and designs and manufactures products for hip, knee, shoulder, elbow and other small joint replacement.
The firm has UK manufacturing bases at Bridgend, South Wales, and Swindon where it produces orthopaedic implants for use in Britain and for export around the world.
Reporting third quarter figures yesterday, S&N said earnings per share rose six per cent before goodwill and pre-tax profits rose from £37m to £70m in the three months to September 30.
Revenues increased by 10 per cent to £357m and the group kept its forecast for 2006 underlying earnings growth of 3 to 5 per cent.
Mr O'Donnell said S&N's sales of orthopaedic reconstruction devices, such as replacement hips and knees, rose 13 per cent in the third quarter, boosted by new launches such as Journey and Legion knees and Birmingham hips.
He said that the increase had significantly outperformed a market growing at about seven per cent, adding that S&N's track record of outperforming rivals showed it did not need to do a deal to get bigger.
"There may be an opportunity to do a deal, but it's certainly not a problem," he said.
Analysts reckon that S&N and Biomet put together would have 14 per cent of the global orthopaedics market, level with Zimmer and behind Stryker and Johnson & Johnson on 15 per cent.
S&N also said it was reviewing all of its businesses in an attempt to drive down costs and improve profit margins.
Mr O'Donnell would not say whether this would involve job cuts.
Analysts said that if a deal were to go ahead, S&N may decide to sell Biomet's dental business.
In addition to its 1,000 employees in Hull, S&N also employs 180 people at a research facility in York.
ros.snowdon@ypn.co.uk