Break-up bombshell rocks Smith & Nephew

Smith & Nephew is facing calls to break the company up as investors grow frustrated with its turnaround plan.

The medical equipment giant’s shareholders have put chief executive Deepak Nath on notice to urgently improve the underperforming company’s fortunes or be ousted.

Investors in the FTSE 100 group are running out of patience with the pace of Nath’s strategy, which he launched months after joining two years ago.

Smith & Nephew, founded in Hull in 1856, develops technology for surgeries such as repairing soft tissue injuries. Its chairman is Rupert Soames, 65, the former boss of outsourcer Serco and Sir Winston Churchill’s grandson.

The company is made up of three divisions: sports medicine, wound management, and orthopaedics. Its sports medicine and wound management arms are both considered to be the second best in the world for those specialisms. 

But shareholders are hoping for a shake-up in Smith & Nephew’s orthopaedics division – which is thought to be a potential spin off candidate.

Shares in the company are down nearly 14 per cent so far this year and have tumbled 44 per cent in the past five years.

Overall profit margins are around 17 per cent, much lower than its competitors such as Johnson & Johnson and Stryker.

The Mail on Sunday understands that investors are happy with Soames’ leadership of the board but that the jury is still out on US-based Nath.

The company’s largest shareholder is BlackRock with 5 per cent, while activist hedge funds Cevian Capital and Harris Associates are also top ten holders. Cevian has not made its intentions public for Smith & Nephew but under founder Christer Gardell the hedge fund has developed a fearsome reputation.

The hedge fund is best known for its role in trying to split up German steel giant ThyssenKrupp back in 2018. Ulrich Lehner, ThyssenKrupp chairman at the time, accused the activist investors involved of ‘psycho-terror’ tactics to force the resignation of several senior executives.

Nath took the reins in July 2022 as the latest in a revolving door of chief executives. The London-based company has had four bosses in the last five years.

He faced a shareholder backlash this year over plans to increase his pay to more than £9 million, with 43 per cent of investors opposing the move.

In the latest blow, the company reported ‘disappointing’ third quarter results last month and downgraded sales and profit margin guidance. Revenue growth for the year is expected to be about 4.5 per cent, a previous estimate was up to 6 per cent. 

It reignited investor frustration and speculation that Smith & Nephew could offload underperforming parts of the business. Deutsche Bank downgraded the stock from buy to hold and said ‘we think there will be some revisiting the break-up thesis’.

Analysts warned they were ‘left questioning what the immediate catalyst would be to unlock’ value.

‘In our view, the updated outlook has meant at least a one-year setback to reaching mid-term targets,’ analyst Kane Slutzkin said. And they want the company to slash central costs and overhaul its troubled Chinese business.

Berenberg warned this week that it is ‘uncertain if the firm will see a significant improvement in financials over the next year’.

‘Two years into the company’s turnaround plan, the slow pace of recovery somewhat calls into question the level of improvement we can expect from management’s 12-point plan in the medium term,’ the analysts said.

A Smith & Nephew spokesman said: ‘Over the last two years we have delivered revenue growth above historical levels and increased profitability. There is clear momentum… and continued delivery of innovation.

‘While the impact of China was a challenge for us, we are confident we are on the right course.’