Smith & Nephew knocked back by Centerpulse

Smith & Nephew, the maker of artificial hips and knees, was dealt a blow in its bid to take over Centerpulse yesterday when the Swiss company said it would be equally happy to recommend a bid from the US giant Zimmer.

Max Link, the Centerpulse chairman, went out of his way to praise the Zimmer management and strategy after S&N had waged a public campaign arguing its organisation would be a better cultural fit with Centerpulse. Mr Link told his shareholders: "Both Zimmer and S&N are well run companies and in different ways a combination with either bidder has much to be recommended, offering an excellent opportunity to build an industry leader."

Zimmer's £1.8bn bid for Centerpulse trumped an agreed £1.4bn offer from S&N in May, but a further round of bids from the pair are expected next month and the company is valued by the Swiss market at more than £1.9bn already.

Centerpulse let it be known it would be recommending the highest offer - another setback to S&N, which hopes to persuade Swiss investors that its shares would offer the greater medium-term upside, even if the value of its bid is lower than Zimmer's.

Mr Link said he would make a final recommendation in favour of "the offer that constitutes the better value for Centerpulse's shareholders", while a spokesman said this meant the offer that is "the most economically valuable to shareholders at the time the board makes its final recommendation".

There are signs that S&N shareholders are increasingly nervous it could be drawn into overpaying for Centerpulse. Its shares have tumbled since Zimmer entered the fray, but bounced 5.25p to 355p yesterday as the market interpreted the Centerpulse statement as a boost to the US company's chances of success.

One of S&N's biggest shareholders said: "I'm not sure how it would go down if it was to pay up to the current Centerpulse share price, and I'm not even sure I can see how they can without a big bond convertible into S&N shares. Both it and Zimmer appear to be conducting a scorched earth policy, trying to make sure the other side overpays for it."

S&N could raise its offer to almost £2bn before it becomes too dilutive to earnings, analysts say, but Zimmer, whose shares are more highly rated, is said to be preparing a £2bn-plus knockout bid. Mr Link - who will receive a £2.2m payment if he leaves the company as a result of a takeover - said his shareholders should take no action until it was clear final offers were on the table.

Sir Christopher O'Donnell, S&N's chief executive, believes that issues such as job security and management style could sway the opinion of the 15 to 25 per cent of Centerpulse shareholders based in Switzerland.

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