Artificial knee and hip maker Smith & Nephew said on Friday it was not in talks on a merger or takeover, after a report it was weighing a deal with privately owned U.S. rival Biomet sent its shares higher.

Speculation of a deal involving Biomet, which the Daily Telegraph said would be structured as a merger, followed an earlier report that a 7 billion pounds ($11 billion) bid from Johnson & Johnson had been rejected last month.

The British company, which also has woundcare and endoscopy units, has been tipped as a target for some time, although industry analysts say a takeover by a large U.S. rival like Biomet or J&J could run into antitrust issues.

Shares in Smith & Nephew (S&N), which hit a record high of 739 pence on Monday after the report of the J&J bid, initially jumped as much as 4.6 percent on Friday on the Biomet merger report. The stock reversed the gains to stand 1.0 percent lower by 1237 GMT after S&N's statement.

Smith & Nephew has a long standing policy of not commenting on press speculation, unless there is a regulatory obligation to do so, the company said in a short release.

However, exceptionally, Smith & Nephew wishes to clarify that it is not engaged in any discussions which could lead to a merger or a takeover involving the company.

A spokesman said the statement had been issued voluntarily to clear the air and allow management to focus on running the company.


Seymour Pierce analyst Mike Mitchell said the pressure on the company to issue a statement to the market had been quite substantial.

Despite the denial, however, he said the rationale remained behind S&N being bought by a larger player, such as J&J, Zimmer or Stryker -- which rank first, second and third in the market -- or doing a deal with a rival with a similar share, like Biomet.

A lot of the points that have been debated are still salient -- i.e. medical technology, and orthopaedics in particular, is a scale game, he said.

And he said companies were starting to look at how they could overcome antitrust hurdles. While today's statement puts a dampener on things in the near term, I don't think it's an issue that's gone away for good.

The Daily Telegraph said Biomet, which is owned by a Blackstone Group , Goldman Sachs , Kohlberg Kravis Roberts and TPG Capital , was set to begin informal talks about a potential 15 billion pounds merger, without citing sources.

Investec analyst Seb Jantet, who moved to a hold from buy after the price spiked on Monday and no deal materialized, said a merger with Biomet would be less attractive than a potential cash bid.

The positive is it gives them scale in the orthopaedics market and there will be some cost savings, although those would be difficult to quantify at this stage, he said.

The bad news for shareholders is you massively increase the gearing levels of the group to take on all of Biomet's debt.

Jantet also said a merger would rule out a takeover from a larger rival on competition grounds, removing the premium from the stock, and it would also focus the group on orthopaedics, the slowest-growing part of the business.

Scale is becoming increasingly important in orthopaedics as hospitals consolidate suppliers to reduce costs -- and S&N's Chief Executive David Illingworth said this week there would be consolidation in the industry.

Customers are going to want to deal with companies that have a thoughtful, broad range of products and services, he said at the J.P. Morgan Healthcare Conference in San Francisco on Monday.

(Editing by Hans Peters)

($1=.6312 Pound)