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Smith & Nephew $3 bln spinal deal is a backbreaker

By Dasha Afanasieva

(The author is a Breakingviews columnist.)

LONDON, Feb 11 ( Breakingviews) - Less than a year after becoming Chief Executive, Namal Nawana laments that sales of most of Smith & Nephew's products are growing more slowly than their respective markets. A multibillion-dollar acquisition in a totally new area, like the potential takeover of spinal surgery group NuVasive, looks like a risky solution.

However, shareholders appear to be wary of straying too far. Smith & Nephew's stock fell around 4 percent on Monday after the Financial Times reported that Nawana is eyeing an acquisition of NuVasive, worth $3 billion including debt. NuVasive's top line is expected to grow by 6 percent this year, according to Refinitiv, but the spine market overall is sluggish: JPMorgan reckons annual sales growth of just 2.6 percent over the next four years. And cost savings would be limited given the lack of overlap, and the need for specialist salespeople.

Assume a 25 percent premium, and the total outlay, including debt, would be about $3.7 billion. Analysts expect NuVasive to make $263 million of operating profit in 2022, according to Refinitiv. Throw in cost savings of $70 million, the average of Jefferies and Credit Suisse forecasts, and Smith & Nephew shareholders would acquire operating profit of perhaps $333 million, and earn a post-tax return on invested capital of just over 7 percent. The sector's cost of capital is probably around 8 percent.

Nawana is no stranger to the spine sector or bold deals. As worldwide president of Johnson & Johnson'sDePuy Synthes unit, he oversaw the integration of Synthes following its $22 billion acquisition in 2012. Still, a more modest approach may be more effective. Since taking over in 2018, Nawana has been conducting a review of each business, and looking at small bolt-on acquisitions, like a recent deal for Ceterix. Smith & Nephew shares had risen by 16 percent since he took over, before Monday's fall. Just like in medicine, where surgery is a last resort, Nawana should complete his less-invasive treatments before trying anything too drastic.

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CONTEXT NEWS

- Smith & Nephew is in talks to buy NuVasive, which makes equipment for spinal surgery, the Financial Times reported on Feb. 8, citing unnamed sources. NuVasive is worth $3.05 billion including debt.

- The acquisition would mark the first major move by Smith & Nephew Chief Executive Namal Nawana who took over from Olivier Bohuon in May 2018.

- Shares in London-listed Smith & Nephew were down just over 5 percent to 14.36 pounds at 1217 GMT on Feb. 11.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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