Smith & Nephew suffers as J&J buys rival

Shares in prosthetic limb maker Smith & Nephew have fallen 3.2 per cent on the news that US healthcare giant Johnson & Johnson is to buy its Swiss rival Synthes.

J&J is to buy Synthes, which makes medical devices, for 19bn Swiss francs (£13.1bn) in its largest ever buy, to boost its orthopaedic business and reshaping the industry.

The US healthcare group will pay CHF 159 in cash and stock for each Synthes share, the two companies have said – a premium of 8.5 per cent over Synthes's closing share price on Tuesday.

A deal had been anticipated after Synthes said on April 18 it was in talks with J&J, but puts an end to speculation that a link-up with S&N could be revived.

In January, S&N rejected a 750p per share offer from J&J, which valued it at £7bn. Analysts said the offer was too low, and argued that S&N could command an offer of 1,057p per share, or £9.42bn.

S&N shares were trading at 649p at 13:00 GMT today.

J&J's acquisition, which is likely to close in the first half of 2012, has the backing of both the Synthes and J&J boards and will give J&J a leading position in equipment to treat trauma.

Synthes, which posted sales of $3.7bn in 2010, makes nails, screws and plates to fix broken bones, as well as artificial spine discs.

"Orthopaedics is a large and growing $37bn global market and represents an important growth driver for Johnson & Johnson," said Bill Weldon, J&J's chairman and chief executive.

The deal is expected to have a modestly dilutive impact on J&J's adjusted earnings per share for 2012.

Crucially, the deal has the backing of Hansjoerg Wyss, who holds 40 per cent of Synthes directly and another eight per cent through family trusts, and was seen as key to any deal going through.

Synthes holds its annual general meeting on Thursday.

"It is surprising the deal has been struck between cash and shares. The market consensus, and our view, was it would be all cash, so the quality of the take-out is slightly lower than we anticipated," said Morgan Stanley analyst Michael Jungling.

"The take-out valuation doesn't seem particularly demanding. It's a scarce asset, and the acquisition makes J&J the number one in the world in orthopaedics," Jungling said.