Rival trumps Smith & Nephew bid

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Smith & Nephew's agreed deal to buy Switzerland's Centerpulse was in danger of being derailed yesterday after the US orthopaedics company Zimmer Holdings said it planned to mount a $3.22bn (£1.96bn) counter-bid.

Zimmer, which designs and makes surgical products such as knee and hip implants (but not Zimmer frames) said the move, if successful, would create a company with a 30 per cent market share.

Based on Monday's closing share price, its proposed offer is 19 per cent better than the cash and shares offer made by Smith & Nephew in March, a deal that the UK company said would have created the world's third biggest orthopaedics business.

Centerpulse, a provider of artificial implants formerly called Sulzer Medica, was brought to the brink of collapse by lawsuits over faulty hip replacements. It said last night it was evaluating Zimmer's proposal and would make a statement "in due course".

The planned counter bid sent shares in Smith & Nephew down 37.5p to close at 375p - making it the biggest faller in the FTSE 100 index as investors feared the company looked likely to lose out.

Analysts at Merrill Lynch said: "Although there are still a number of details to be worked through, at the end of the day it appears that Zimmer's financial flexibility will allow it to sustain a more compelling offer over Smith & Nephew."

Traders said the fall in Smith & Nephew shares was exacerbated by investors who had carried out complex arbitrage trades - buying shares in the UK company and selling short shares in the Swiss company. The fall in Smith & Nephew stock and the rise in Centerpulse shares, which closed up around 14 per cent, would have hurt those traders on both sides of the equation.

Smith & Nephew said Zimmer's proposed offer remained subject to "a number of additional conditions" and to a period of due diligence. It said it would "continue to monitor" the situation.

Zimmer hit back by saying it hoped to launch a formal offer for Centerpulse on 17 June and thought it could have the deal completed by the end of August. It is not expecting any regulatory hurdles. Zimmer is planning to offer 3.68 shares plus 120 Swiss francs of cash for each Centerpulse share. Analysts said that represented a 19 per cent premium over the Smith & Nephew offer.

The UK company had offered 25.15 new shares and 73.42 Swiss francs in cash for each Centerpulse share. Smith & Nephew will be owed around £9.5m in break fees if the deal is not concluded and Centerpulse is sold to another buyer.

Analysts were not particularly surprised that a counter offer for Centerpulse had emerged considering Smith & Nephew's offer had represented a premium of just 4 per cent to Centerpulse's value before the deal and since Zimmer had held talks with Centerpulse last year.

Ray Elliott, Zimmer's chairman and chief executive, said he believed the $3.22bn offer was "both financially and strategically superior to Smith & Nephew's offer, both immediately and over the long term."

Like Smith & Nephew, Zimmer is also making an offer for InCentive Capital, Centerpulse's largest shareholder with an 18.9 per cent stake.

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