JPMorgan expects M&A premium at Smith & Nephew to unwind as Stryker hopes fade

The bank retained a 'neutral' rating and 1,040p target price on the UK stock.

Last week's announcement of a $2bn share buyback by Stryker suggests that the US group has taken potential large acquisitions off the table, JPMorgan said.

"Some market participants have expressed the view that Stryker may still revisit S&N; we think this is unlikely," the bank said.

"We have been surprised at the limited impact that such an announcement has had on S&N's share price. We expect some further unwinding of the premium as investor hopes for any possible Stryker-S&N union fade."

JPMorgan said that S&N is still trading on a premium to others in the sector, at 17.4 times 2016 estimated earnings compared with lower multiples at Stryker (16.8), Zimmer (13.7) and Johnson & Johnson (15.3).

"S&N shares have traded at a premium to all three key peers since late 2013. We believe this premium will subside in coming weeks, moving towards our target price," it said.

At the same time, with the Zimmer-Biomet merger expected to close in the coming weeks, JPMorgan said it expects anti-trust regulators to force the two companies to dispose of some assets, with S&N being a potential acquirer.

The bank said: "We think forced disposals are more likely to be at an attractive price and could be nicely accretive for a successful buyer, potentially including S&N."

The stock was down 0.2% at 1,111p by 11:28 on Wednesday.