Commenting on last week's report in the Financial Times that discussed rumors that Wright Medical (WMGI) could be a takeover target for one of the major orthopedics groups, Wells Fargo analyst Larry Biegelsen noted that the company's operating performance and CEO track record is fueling investor speculation. This comes after his peer at Needham said that while he sees a takeover as possible, the list of buyers may be short, with Smith & Nephew (SNN) as the most logical buyer.

INCREASED TAKEOUT SPECULATION: In a research note this morning, Wells Fargo's Biegelsen said he has received several investor questions after the Financial Times' report. While investors have long speculated that current Wright Medical CEO, Bob Palmisano, because of his track record of selling companies, was positioning Wright to be sold since he took over in 2011, Biegelsen pointed out that increased investor takeout speculation has been fueled by the company's strong underlying fundamentals that suggest that the company can attain its merger goals of mid-teens sales growth and 20% EBITDA margin. Additionally, he noted that the metal-on-metal litigation settlement removed an overhang, the Tornier integration is largely complete, and Wright Medical's focus on the high-growth extremities market and the underinvestment in the space by competitors make it a differentiated asset. The analyst reiterated an Outperform rating on the stock and raised his price target range on the shares to $35-$36 from $31-$32 as he expects the company to beat and raise throughout 2017. A buyout would provide upside to his valuation range, he added. Last week, his peer at Northcoast upgraded Wright Medical to Buy, citing his view of an increased likelihood of a takeout in 2017. Analyst David Kaiser told investors that he believes Smith & Nephew is the most logical acquirer given it has virtually no presence in the extremity market, has a very strong balance sheet, and a clear strategy to shift its business mix to faster-growing areas.

SHORT LIST OF POTENTIAL BUYERS: On March 22, Needham analyst Mike Matson told investors in a research note of his own that he thinks Wright Medical is a potential acquisition candidate. However, the analyst noted that the company's current margins would limit earnings accretion for potential buyers and said he believes the list of potential buyers is short. Matson thinks that Stryker (SYK) and Zimmer Biomet (ZBH) would face anti-trust issues, while he is not sure Johnson & Johnson (JNJ) wants to increase its exposure to orthopedics. The analyst believes Smith & Nephew is the only orthopedics company where an acquisition of Wright Medical could perhaps make sense given a smaller presence in lower and upper extremities and a need for growth. Outside of the traditional orthopedics companies, Medtronic (MDT) might be interested, but may need to figure out its orthopedics strategy first, Matson contended. Nonetheless, the analyst said that both management and board members have sold Wright Medical shares recently, which seems unusual if a deal were imminent. He reiterated a Hold rating on the shares.

PRICE ACTION: In morning trading, shares of Wright Medical are nearly flat at $30.72. Since March 21, when Financial Times' Bryce Elder noted that Smith & Nephew shares were weak, attributing that trading action to speculation that Wright Medical "could be a takeover target for one of the major orthopaedics groups," Wright shares are up a bit over 2%.