Smith & Nephew faces long and painful activist fix

Deep surgery. Smith & Nephew should prepare for a long and painful activist treatment. On Thursday, Swedish investor Cevian Capital announced it h taken a 5% stake in $11 billion UK-listed maker of hip joints and wound care kit. Its medicine is likely to involve stripping out costs. If that fails, more rical remedies like a breakup may be necessary.

Smith & Nephew has many ingredients activists look for in a target. Its share price has fallen 42% over past five years, whereas FTSE 100 Index is up by 10%. Endless management churn can’t have helped: during that same period group has h three CEOs and three chief financial officers. Its boss, Deepak Nath, has introduced a 12-point plan to increase company’s performance.

Investors, however, are not convinced. Including debt, Smith & Nephew is valued at $14 billion, just 13 times its expected operating profit in 2025, according to LSEG data, a steep discount to its five-year average of 18 times. Cevian has not yet disclosed its demands, but activist could push Nath to take a bigger axe to Smith & Nephew’s bloated cost base, which resulted in an operating margin of just 17% last year. U.S.-listed rival Stryker generated a 24% margin.

Assume Smith & Nephew can close half profitability gap with Stryker, and its EBIT margin would reach 21%. Apply that to $6.7 billion of revenue London-listed firm is expected to deliver in 2027, and operating profit could total $1.4 billion that year. Next, assume a leaner, more profitable Smith & Nephew is valued at 17 times forward EBIT, again closing half gap with Stryker’s multiple, and its enterprise value could exceed $24 billion in two years. That’s nearly 70% higher than its current worth.

If Nath fails, deeper surgery may be necessary. Last year orthopaedic division that makes artificial hip and knee joints was slowest growing of Smith & Nephew’s business units. Selling that to a rival, like Stryker, could free up cash to invest in or two units, wound care and sports injuries. Alternatively, switching its primary listing to United States may attract more investors, and a higher valuation. But a recovery is likely to take time. As activist campaigns go, Smith & Nephew will be more than a quick fix.