Following a report that said Smith & Nephew (SNN) has held talks to buy NuVasive (NUVA), several analysts weighed in on whether they think such a deal will happen.
BACKGROUND: Smith & Nephew has held talks to buy NuVasive, which makes medical instruments used in spinal surgery, The Financial Times' Arash Massoudi and Eric Platt reported on Friday. A deal could be worth more than $3B, people with direct knowledge of the talks said. The acquisition would mark the first major move by Smith & Nephew Chief Executive Officer Namal Nawana, who was appointed to the role last April, according to the report. Smith & Nephew has been under pressure from activists including Elliott Management to improve its margins, shed underperforming businesses and find new sources of growth to increase competition with bigger rivals including Zimmer Biomet (ZBH), Stryker (SYK) and Johnson & Johnson (JNJ). Last week, Nawana said Smith & Nephew was looking at deals to "get access to adjacent markets, and where there’s a good strategic fit."
ANALYST TAKES: On Friday, Piper Jaffray analyst Matt O'Brien said he does not believe a deal will happen between Smith & Nephew and NuVasive, as the spine market does not grow much making it less attractive than other orthopedic segments. O'Brien, who noted that the lanscape is "littered" with failed spine deals, thinks shares of Wright Medical (WMGI) will trade lower as the most likely suitor for them would be off the table if a NuVasive deal occurred. The analyst believes a Smith & Nephew/NuVasive combination would be positive for Globus Medical (GMED) and SeaSpine (SPNE) as they would likely take share in the category. Cantor Fitzgerald analyst Craig Bijou, in a research note of his own, also called a Smith & Nephew/NuVasive deal "unlikely," as he sees more attractive acquisition targets that would better align with the company's goals. He agreed with Piper's O'Brien that the report of deal talks will put pressure on shares of Wright Medical, as many investors believe that Smith & Nephew is a potential acquirer of Wright and a NuVasive deal would make that combo unlikely in the near-term.
Additionally, after hosting a call with management, JPMorgan analyst David Adlington said he believes Smith & Nephew is "clearly setting out its intentions for higher M&A activity from here." He doesn't think NuVasive fits the company's M&A criteria, but said that M&A is "clearly on the agenda." Adlington said that early investor feedback has indicated that this particular deal would not be well received, although it would likely be at least high-single-digit earnings accretive, as the spine market is low growth.
However, at least one analyst thinks a deal between Smith & Nephew and NuVasive "makes some sense." Jefferies analyst Raj Denhoy said an acquisition of NuVasive would add the number three spine company and add to growth, but admits the timing of the reported talks is "strange," given the recent management change at NuVasive. Denhoy also said he believes questions on if spine and NuVasive are the best places for Smith & Nephew to invest will persist.
PRICE ACTION: In morning trading, shares of Smith & Nephew are down 4.6% to $38.35, while NuVasive is up 12.7% to $55.82.