S&N's £1.5bn offer for Swiss hip firm may spark rival bids

Smith & Nephew, the UK's biggest maker of artificial hips, elbows and knees, is paying £1.5bn for a Swiss specialist in hips, spinal implants and screw-in teeth in a deal that will create the third-largest orthopaedics group in the world.

The FTSE 100 group is issuing cash and shares to finance the agreed bid for Centerpulse, which used to be known as Sulzer Medica and was brought to the brink of collapse by lawsuits over faulty hip replacements.

But analysts warned yesterday that S&N's offer, which represented a premium of just 4 per cent to Centerpulse's value before the deal, could tempt a rival bidder. Medical devices giants including Zimmer, Medtronic and Biomet indicated an interest at the start of the year, but none followed through with a formal offer.

Chris O'Donnell, S&N's famously conservative chief executive, joked that his offer represented "a massive premium. This is Smith & Nephew, remember".

S&N shares fell 3.5 per cent to 368p on the news it is to issue more than £1bn of new shares. The company is also buying Centerpulse's largest shareholder, an investment company called InCentive Capital, which owns 19 per cent. Centerpulse shares fell in Zurich.

Mr O'Donnell dismissed fears that the issue of Centerpulse's faulty hip replacements would return to haunt the enlarged group, which will have a market value of £4.6bn. An estimated 4,000 people were given new hip joints stained with oil that subsequently failed to bond with the bone.

He said: "We have got a pretty fair fix on this issue. The last ones went in in 2000, and because you have excrutiating pain, you don't sit around for two years – you say to your doctor you want it replaced straight away. Most revisions were done fast in 2001, so now there is only a trickle of residual cases, perhaps people who weren't fit enough for an operation immediately."

Centerpulse set aside $725m (£463m) to pay compensation for the first 4,000 claims, of which 3,718 have been settled to date. S&N will pick up part of the tab for cases exceeding 4,000.

Demand for replacement joints is driven by the ageing population and by improvements in technology which are encouraging younger people into such operations. The oldest artificial hips also have to be replaced every 10 years or so.

S&N said it could deliver 20 per cent earnings growth a year as a result of its acquisition, and £45m of annual cost savings can be achieved with a maximum of 100 redundancies.