Smith & Nephew (FTSE:SN, NYSE:SNN) shares gained in London and New York today on an analyst’s speculation that the British medical device maker is ripe for a spinout akin to the Baxter (NYSE:BAX) split announced this week.
Nicholas Keher, an analyst with Investec, said Smith & Nephew could unlock value for shareholders by splitting its 3 main divisions – advanced wound management, endoscopy and orthopedics – into independent companies.
"Smith & Nephew is beginning to look like a growth stock again – we forecast a 3-year earnings per share compound annual growth rate over 10% and believe a re-rating is due," Keher wrote. "Moreover, we believe even more value could be created by breaking up the group into 3 separate entities."
The speculation pushed SN shares up 2.4% to £92.17 apiece as of the market’s close in London today. In New York, SNN shares rose 2.4% to $77.04 apiece as of about 1:10 p.m. today.
Keher said each of Smith & Nephew’s divisions is large enough to carry its own water.
"Moreover, we think each operates with such distinct business models that they require different strategies for capital allocation. We also struggle to identify adequate synergies in sales, manufacturing or R&D to justify the current combined structure. Recent examples illustrate the market’s appreciation for more streamlined business models with Abbott spinning out AbbVie and Covidien listing Mallinckrodt. Smith & Nephew’s chief executive also has past experience in deals of this sort," Keher wrote. "Whilst a break up has not been suggested or discussed by management, we feel the markets are ready and supportive. We believe there are key events that could act as potential triggers. These include the approval or positive Phase III data from HP802-247 (an AWM pipeline asset), the realization of synergy benefits from the Arthrocare acquisition or a large acquisition focused on orthopedics to drive growth rates within that division."
Earlier this week, Baxter announced its plan to spin out its pharmaceuticals business. In 2011, Abbott announced its plans for a similar split, saying it would carve out its pharma operation as a new, publicly traded company later named AbbVie (NYSE:ABBV). Later that year, Covidien said it would also divest its own pharmaceuticals division as Mallinckrodt plc (NYSE: MNK). And late last year, Kimberly-Clark (NYSE:KMB) shares hit a 52-week high on the news of its plan to spin out its medical device and health products division as a separate public company called K-C Health Care.
