ParfumGigi@aol.com

By Mark Potter

LONDON (Reuters) - A regulatory filing this week has added to the pressure on Smith & Nephew to spell out its plans after losing a bid battle for U.S. rival Biomet, boosting talk the British firm itself is a bid target.

The filing from Biomet with the U.S. Securities and Exchange Commission shows Smith & Nephew (S&N), Europe's biggest medical devices firm, offered to pay $45 a share in the bid battle.

This was above the $44-a-share bid Biomet eventually agreed with a private equity team including the Blackstone Group, Goldman Sachs, Kohlberg Kravis Roberts and TPG.

Biomet believed S&N's bid carried more risks, including that S&N itself might become a takeover target, the filing shows.

The document also reveals Biomet received expressions of interest from two unnamed "strategic bidders," which some analysts say increases the chances of a bid for S&N itself.

"We view Smith & Nephew as attractive as Biomet to a strategic buyer," UBS analysts wrote in a research note this week, suggesting U.S. healthcare groups Medtronic and Abbott may have been the unnamed Biomet suitors.

But they, like most other analysts, think if S&N does attract a bid it will most likely be private equity-led. "A LBO (leveraged buyout) scenario is most likely," they wrote.

Traditionally wary of the complex healthcare sector, cash-rich private equity firms are becoming increasingly attracted to a sector with strong cash flows, predictable sales, solid balance sheets and cost-cutting opportunities.

QUESTIONS

S&N's attempt to buy Biomet was, according to some analysts, its last chance to join the top table of major orthopaedics companies - U.S. groups Stryker , Johnson & Johnson and Zimmer . S&N also lost out to Zimmer in a bid battle for Switzerland's Centerpulse in 2003.

The latest defeat will add to the pressure on S&N to come up with convincing plans of how it intends to keep up the challenge to bigger rivals when it announces 2006 results on Thursday.

S&N, which makes joint implants, wound treatments and keyhole surgery instruments, has already said it is looking to drive down costs and analysts will be keen for details on how it plans to close the gap in profit margins with bigger rivals.

S&N has acknowledged it trails the "best-in-class" margins in its different businesses by 300 to 500 basis points.

Several analysts also think S&N could signal its willingness to return cash to shareholders, which could help it to head off a bid approach. Investment bank Goldman Sachs believes the firm could comfortably afford to hand back $1.2 billion to investors.

Others suggest S&N could sell its underperforming woundcare business to boost the cash return. But this could also make it more attractive to a healthcare company looking to expand into orthopaedics.

S&N is expected to report 2006 earnings per share before goodwill of $43 a share to $45 a share, compared with $43 in 2005, according to a poll of 12 analysts by the company. Revenues are forecast at $2.70 billion to $2.77 billion, up from $2.55 billion.

S&N shares hit a 2-1/2 year high of 585 pence last week, in part on speculation it is a bid target. They trade at 23 times 2007 earnings forecasts, compared with 25.6 times for Stryker, 21.5 times for Zimmer and 15.5 times for the more diversified Johnson & Johnson, according to Reuters Estimates.

To see Biomet's SEC filing, please click on:

http://www.sec.gov/Archives/edgar/data/351346/000110465907005875/a07-2220_1prem14a.htm