Credit Suisse sees upside at Smith & Nephew in potential Stryker takeover

29th May 2014 11:12

Credit Suisse has kept its 'neutral' stance on medical device maker Smith & Nephew (S&N) but has said it sees upside to the share price if the rumoured takeover by US peer Stryker were to go ahead.Shares in S&N surged on Wednesday afternoon after numerous reports that Stryker was working on a bid for the UK-listed company, though gains were quickly pared after the US group publicly denied the speculation.Stryker is now bound by the rules of the UK Takeover Code which means it cannot make an offer for S&N unless invited to do so by the latter's board.However, Credit Suisse chose the opportunity to estimate the impact of a hypothetical transaction.The bank said that, assuming industry-typical merger synergies of around 9-11% of sales of the acquired entity - applied solely to S&N's Advanced Surgical Division - "we mechanically calculate a value of the merger synergies of about 160-195p/S&N share"."Of course, depending on the capital structure applied and the prevailing debt financing costs, we think there would be substantial additional non-operational, purely financial gearing related benefits in such a transaction."On a stand-alone basis, Credit Suisse has a target price for S&N of 865p.In a separate note, Deutsche Bank said that while such a deal would be "rational" given Zimmer's recent purchase of Biomet , "it would, among other considerations, be too soon for Stryker's team undertake such a large endeavour". This is because the US company is still involved in the integration of MAKO Surgical Group which is acquired last year.Nevertheless, it did admit that a potential merger would have a "number of benefits".BC