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Zimmer lays down gauntlet to S&N
Ray Elliott, chief executive of  Zimmer, on Monday laid down the gauntlet in front of Chris O'Donnell, head of Smith & Nephew, when he ruled out a dilutive bid for Centerpulse, the Swiss orthopaedics company at the centre of a bid battle.

Mr Elliott, who last month launched a hostile attempt to break up S&N's agreed acquisition of Centerpulse, said that Mr O'Donnell would prevail if the group were to muster a bid above a level that would make the deal dilutive for Zimmer

Mr Elliott said Zimmer's acquisition criteria were rigid to the point of losing a deal that could transform his company rather than dilute earnings in the first two years or damage its investment grade credit rating. "If they go up above it by one pound sterling, the business will be theirs," Mr Elliott said in an interview with the Financial Times. " . . . The single biggest reason deals fail [after completion] is because people overpay."

A Centerpulse/Zimmer combination would create the world's leader in orthopaedics, selling products including knee and hip replacement implants and give Zimmer a spinal business and strong European presence. A deal with S&N would create the world's third-largest group after Johnson & Johnson's Depuy unit and Stryker.

Dilution could well be the deciding issue in the battle for Centerpulse - in a game to see who blinks first. Both companies have the financial capacity to significantly increase their bids. Both men are known for their disciplined financial and acquisition parameters. Analysts say Zimmer could afford to pay SFr400-a-share. S&N faces dilution at about SFr380 ($288).

Mr Elliott's challenge gives Mr O'Donnell a stark choice between diluting his shareholders' earnings or remaining a second-division player in hip and knee replacements.

Mr O'Donnell is understood to be comfortable raising S&N's debt by 50 per cent, to about $2.45bn, enough to offer SFr350-a-share - or equal to Zimmer's original bid value.

S&N's standing offer is SFr274 per share. Zimmer's offer is now worth SFr329 per share, because its shares have fallen to near $44.

However, some analysts suggest S&N could afford to bid more if it sold off non-core units such as Centerpulse's dental division.

Lehman Brothers estimates Zimmer could pay near SFr400 with mild dilution next year, and no impact on earnings in 2005. "Should Zimmer elect to increase the cash component of the deal, the maximum amount that Zimmer could pay would increase," noted Bob Hopkins, analyst at Lehman Brothers.