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Smiths close to calling off €7bn medical merger

By Mark Kleinman, City editor
Smiths Group, the FTSE-100 in?dustrial conglomerate, is close to calling off talks with a rival about a ?7bn merger that would have created a transatlantic healthcare giant.
Sky News has learnt that Smiths is leaning towards a decision to halt negotiations with Nasdaq-listed ICU Medical about a tie-up more than two months after they got underway.
A final decision has yet to be made by Smiths' chief executive, Andy Reynolds Smith, and a person close to the British company insisted on Tuesday night that any change in its position would be announced immediately to the London Stock Exchange.Banking sources said that news of the talks between Smiths and ICU, which were confirmed after Sky News revealed them in May, had prompted Baxter International, another US healthcare company, to express an interest in buying Smiths Medical outright.It was unclear whether any live talks were still taking place between Smiths and Baxter or any other potential suitors.News of the discussions was welcomed by Smiths investors in May amid hopes that the company was close to unlocking part of the value bound up in its conglomerate structure.Since then, both Smiths and ICU are said to have tabled a string of proposals about how a combination could work, with varying degrees of governance and management control being held by the two parties.ICU, which makes devices used in infusion therapy and oncology, is thought to have been keen on a formal merger of the businesses rather than a more straightforward joint venture.The Nasdaq-listed ICU has a market value of $6bn‎ (€4.6bn), while Smiths Medical was likely to have been valued at more than €2.5bn (€1.9bn) in a transaction.The US-based company has a long track record of takeovers including the $900m purchase completed last year of Pfizer's Hospira Infusion Systems arm.Smiths Medical, which also supplies advanced devices to healthcare markets around the world, accounts for just under 30% of the group's revenues, making it the company's largest unit on that basis.Its performance has been rocky in recent years, with revenue in the half-year to January down 5% to €451m.
Last month, Smiths Group shares tumbled after the company said that changes to European Union rules on medical devices would hurt sales from 2020.The company said this year that it was making "significant progress on its return to growth" in the medical‎ arena but cautioned that higher research and development costs were having an impact on short-term profitability.Smiths also operates in areas such as security detection, making much of the body-scanning equipment used at airports around the world.In total, it has five main divisions‎, which also include John Crane, a provider of engineering solutions for energy and other process industries.The company's structure has long been a source of consternation for some investors and analysts, although talk of a takeover or break-up has never resulted in significant corporate activity.In recent months there has been growing talk among City investors that Smiths is likely to attract the attention of an activist investor keen on pressing more aggressively for a break-up, although its shares have generally performed strongly in recent months and are up modestly over the last year.Such activism has become increasingly common in the UK‎, with companies including FirstGroup, the transport operator, drug-maker Shire and Costa Coffee-owner Whitbread all the subject of current campaigns.Mr Reynolds Smith, who joined the company in 2015 from GKN, the engineering firm which has just been bought by Melrose Industries, is under pressure to demonstrate that its existing structure continues to deliver benefits to shareholders.
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"Over the medium-term, we are confident that will achieve organic revenue growth above our chosen markets, which in aggregate are growing 3-4% annually," he told the City in March.A Smiths Group spokeswoman declined to comment.
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