Smith & Nephew aims to double size with £5bn takeover of US rival

Smith & Nephew, the FTSE 100 maker of artificial hips and knees, is planning an audacious £5bn-plus takeover bid for its US rival Biomet, which would double the size of the company.

Sir Christopher O'Donnell, the S&N chief executive, admitted yesterday that the pair had held talks, but that a deal was not guaranteed.

Biomet has been examining a possible sale of the business since parting company with its co-founder, Dane Miller, earlier this year. Morgan Stanley, the investment bank, has been appointed to explore its options.

A takeover by S&N would give the combined group more than 20 per cent of the lucrative US market for artificial joints, closing the gap on the big three ortho-paedics companies, Zimmer, Stryker and Johnson & Johnson.

"Biomet is an innovator in the orthopaedics space," Sir Christopher said. "We are interested in innovative companies, large or small."

The acquisition of Biomet would also take S&N into dental implants for the first time, a fast-growing business in which it is believed to be keen to invest.

Morgan Stanley is not yet said to be running a formal auction of Biomet, but hopes to generate interest from other medical technology companies and private- equity bidders. Analysts who know the company believe that Biomet's executive management is keen to remain independent, but has been put on notice by the board that recent poor results must be reversed if a sale is to be avoided.

Biomet shares jumped 4 per cent in early Wall Street trading on news of S&N's interest, valuing the business at $9.5bn (£4.9bn).

The UK company is likely to fund a cash offer for Biomet with a mixture of debt and a rights issue. It hopes that anti-trust concerns might deter the three big orthopaedics players from mounting a rival bid, avoiding the situation it faced three years ago when its £1.4bn bid for Centerpulse of Switzerland was trumped by Zimmer.

A successful deal this time round would yield significant cost synergies, and aid Sir Christopher in his attempts to raise S&N's margins towards the average in the industry. He admitted yesterday that, despite raising operating margin by a percentage point per year, S&N was still lagging behind and would now launch a root-and-branch review of its operations which could lead to job cuts.

The search for cost savings comes as growth in the orthopaedics market has slowed. There are growing pressures on the selling price of artificial joints, and US competition authorities are examining whether companies have conspired to keep prices high or established inappropriate financial relationships with surgeons.