Smith & Nephew fix requires bigger surgery
SNN•Smith & Nephew’s planned merger with Johnson & Johnson’s orthopaedics unit collapsed over who would lead the combined company. The article argues Smith & Nephew may need to consider a breakup, noting its sports and wound care divisions could be worth $18 billion based on a 14-times EBITDA valuation.
1. Merger talks collapse
Smith & Nephew’s planned merger with Johnson & Johnson’s orthopaedics unit fell apart after the companies could not agree on who would run the combined business. The unit would have been valued at $22 billion in the transaction. Smith & Nephew wanted its current chief executive, Deepak Nath, to lead the combined entity rather than former chief executive Namal Nawana, the Financial Times reported.
2. Value of business units
Smith & Nephew’s operating margin fell from nearly 23% before the pandemic to less than 17% last year, and its shares trade at less than nine times next year’s expected EBITDA. Morgan Stanley analysts estimate its sports and wound care divisions could generate about $1.2 billion of EBITDA in 2028; at 14 times EBITDA, those divisions would be worth $18 billion. Orthopaedics accounts for 40% of Smith & Nephew’s revenue.
3. Possible restructuring
The article says Smith & Nephew could consider spinning off its joints and muscles division, possibly merging it with Johnson & Johnson’s equivalent unit. Nath has reorganized operations around commercial business units with separate profit and loss centres. Analysts expect sales to grow 5% annually over the next five years.
