Bidding war possible for Smith & Nephew, says Credit Suisse

5th Jun 2014 10:08

Analysts at Credit Suisse said on Thursday that there is a "potential bidding war on the horizon" for medical devices group Smith & Nephew (SN) as US peer Medtronic (MDT) became the latest company rumoured to be interested in the UK group.According to Bloomberg, which cited people familiar with the matter, MDT is still in in the early stages of preparing to make a bid and no offer is imminent. SN is said to be "aware of Medtronic's interest as are investment banks", Bloomberg said.A potential deal with MDT would be structured as a tax inversion, it said, by which the US group would move its legal residence to the UK, where companies benefit from lower levies.The reports follow comments last week from Kevin Lobo, the Chief Executive of Stryker (SYK), who said that the US company had been considering making an offer for SN. However, SYK was not ready to do so when rumours began to surface and was forced to rule itself out in a statement to the UK Takeover Panel. It is not allowed to make a bid for the company for the next six months, unless invited to do so by SN itself or if another bidder emerges.Credit Suisse pointed out that the MDT business portfolio has "no meaningful overlap with SN"."Strategically, a take-out would not result in significant operational cost synergies, except for in administration. Hence, a combination would mainly be complementary and driven by revenue synergies (e.g. cross-selling in emerging markets) and broaden MDT's diversification."It also said it was unsure about tax inversion benefits given that MDT's effective tax rate this year has been around 20%, lower than SN's expected tax rate of 29%. "Typical tax inversion benefits are not immediately apparent, unless shareholder value creation arising from tax optimisation and the tax effective use of MDT non-US cash pile of S$13bn are very material."Credit Suisse said that a potential takeover by SYK would have higher cost synergy opportunities given a "substantial business overlap" in the areas of large joints, trauma and sports medicine.The bank kept a 'neutral' rating and 865p target price for the stock.BC