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S&N to buys rival for $2.3bn
LONDON, England (Reuters) -- Britain's Smith & Nephew Plc (S&N) agreed to buy Swiss rival Centerpulse AG for 1.5 billion pounds ($2.3 billion) in cash and shares on Thursday to create the world's third-biggest orthopaedics company. Formerly called Sulzer Medica, Centerpulse -- which ranks as Europe's biggest orthopaedics firm -- has been tipped as a takeover target since it paid out $1 billion last year to settle a U.S. lawsuit against faulty knee and hip implants. Analysts welcomed the deal, made up of 25.15 new S&N shares and 73.42 Swiss francs cash for each Centerpulse share, as boosting S&N's largely U.S.-based implants business in Europe and giving it access to the fast-growing spinal implants market. But S&N shares dropped as much as 12 percent in early trade as Swiss investors sold the British firm's stock in anticipation of receiving new shares when the deal closes. There were also concerns a hefty new share issue by S&N might dilute profits for investors and the small premium offered by S&N would not be enough to deter rival bidders -- possibly drawing S&N into a bidding war. "Strategically the deal makes sense, with a good fit both in terms of geography and products,'' said John Wilson, Investment Director at Standard Life Investments. ``The shares look to be down due to the Swiss shareholders selling back to the London market and speculation that there may be a counter bid.'' By 1245 GMT, S&N shares had recovered to be down 1.3 percent at 376-1/2 pence. Shares in Centerpulse were 0.5 percent lower at 276 Swiss francs, in line with a dip in the value of the deal from the original 282 francs per share. Once home to a range of health products such as Elastoplast sticking plasters and Lil-lets tampons, S&N has transformed itself to focus on growing demand for hi-tech medical devices in three fields -- orthopaedics, keyhole surgery and wound care. The orthopaedics market has been growing particularly strongly, as greying populations demand the right to stay active in old age, helping S&N shares to outperform the UK healthcare sector by around 40 percent over the past year. Global sales of orthopaedics devices, like S&N's zirconium hips and knees, which use a hard wearing substance developed for spacecraft, rose 15 percent to about $14 billion in 2002. RIVAL BIDDERS?Last year, S&N repeatedly denied an interest in Centerpulse. O'Donnell said his mind had been changed by the ``excellent work'' the Swiss firm had done in ``putting a solid wall around the litigation'' it had faced over lubricant-covered implants that failed to attach to the bone properly. Centerpulse Chairman and Chief Executive Max Link said there was no outstanding litigation against the firm. Link was also relaxed on the fact the deal offered only a four percent premium to Wednesday's closing Centerpulse share price. "We conceived it as a nil-premium merger because both sides bring significant assets and strengths,'' he told reporters. Michael King, an analyst at WestLB Panmure, said the deal valued Centerpulse at 2.5 times 2002 sales and 14 times earnings before interest, tax and amortisation (EBITDA), compared with S&N's multiples of 3.5 and 16 times respectively. "It seems that S&N has been able to obtain Centerpulse relatively cheaply,'' he wrote in a research note. But some analysts thought S&N -- whose bid includes a cash element worth 400 million pounds in total -- had left the door open to a rival bidder. "I'm astonished that the offer is not much more than the market value and somebody might come in with a better offer,'' said Claude Zehnder, analyst with Zuercher Kantonalbank. Analysts at Swiss private bank Pictet & Cie thought U.S. orthopaedics firm Zimmer Holdings Inc and world number two Stryker Corp might both be interested in Centerpulse to step up pressure on market leader Johnson & Johnson. Any rivals would have to contend with a separate deal S&N had agreed with InCentive Capital AG to buy the investment vehicle's 19 percent stake in Centerpulse. S&N said the deal, which will create a company with a market value of around 4.7 billion pounds, would boost earnings per share of the combined group by mid-single digits in 2004, before integration costs, accelerating to double digits in 2005. S&N expects cost savings of 45 million pounds a year by 2005, with exceptional cash costs of 130 million pounds. It will also assume Centerpulse's debts, which stood at 165 million pounds at December 31, 2002. Separately, Centerpulse posted a net profit of 337 million Swiss francs in 2002 up from a 1.193 billion loss in 2001. S&N said it was being advised by investment bank Lazard. Centerpulse is being advised by Lehman Brothers and UBS Warburg. Copyright 2003 Reuters. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
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