UPDATE 4-Smith & Nephew jumps 13 pct on reported J&J bid

* J&J bid of 7 bln pounds said to have been rejected

* Shares hit record high amid renewed takeover speculation

* Deal would make J&J largest player in new knees and hips

* Smith & Nephew and Johnson & Johnson decline to comment (Adds comment from Smith & Nephew CEO)

By Paul Sandle and Ben Hirschler

LONDON, Jan 10 (Reuters) - The shares of Smith & Nephew Plc (SN.L), Europe's largest maker of replacement knees and hips, hit a record high on Monday on a report it received a bid last month from Johnson & Johnson (JNJ.N), which was not disclosed.

Its U.S. rival made a 7 billion-pound ($10.9 billion) takeover approach that was turned down as inadequate by the British group, Sky News said at the weekend, without citing sources.

Johnson & Johnson (J&J) was considering whether to return with a higher offer after its indicative bid of more than 750 pence a share was spurned as too low, Sky added.

Smith & Nephew (S&N) declined to comment on the report, but the company may now come under pressure to issue a statement, following the sharp rise in its shares.

Companies are obliged by British takeover rules to inform the market of an approach if the news leaks and influences the shares.

Some shareholders of bank-note printer De La Rue Plc (DLAR.L) criticised its management in December for a delay in disclosing an approach from France's Oberthur Technologies SA[FCOFDO.UL].

Smith & Nephew Chief Executive Dave Illingworth, speaking at the J.P. Morgan Healthcare Conference in San Francisco on Monday, said the company has been the subject of merger speculation for a long time.

"We don't comment on market rumours. We don't comment on speculation. We clearly understand what our responsibilities are under the listing guidelines in the U.K.," he told a roomful of investors at the conference.

J&J said that as a matter of policy it did not comment on "rumours and speculation" -- but analysts said such a deal looked sensible and would make its DePuy unit the clear leader in the multibillion-dollar market for new knees and hips.

S&N has been regularly tipped as a bid target for U.S. rivals such as privately owned Biomet and J&J. It also competes with orthopaedics companies Stryker Corp (SYK.N) and Zimmer Holding Inc (ZMH.N). Takeover speculation has gained traction recently, fuelling a run-up in the shares since December.

S&N is a fairly small player in the replacement joint industry and is seen as an attractive target for bigger rivals. Scale is becoming increasingly important in orthopaedics as hospitals seek to consolidate suppliers.

Illingworth, responding to an investor's question, said he would expect there to be consolidation in the marketplace going forward.

"Customers are going to want to deal with companies that have a thoughtful, broad range of products and services," he said.

Buying S&N would make J&J the dominant force in large joint reconstruction with a 36 percent market share, against 25 percent for Zimmer and 22 percent for Stryker, according to Goldman Sachs analyst David Roman.

S&N stock hit a record high of 739 pence on Monday -- up 13.7 percent from Friday's close -- and it was 12.3 percent higher at 730p by 1400 GMT.

COMPETITION ISSUES

Panmure Gordon analyst Savvas Neophytou said a long-awaited bid for S&N was more likely from J&J than a deal with rivals Zimmer or Stryker, given J&J's track record of doing deals.

"If J&J put their considerable muscle behind what S&N do, they would be able to drive growth beyond what S&N could do as a stand-alone business," he said. "It would be a fairly attractive acquisition for J&J."

S&N has done a good job in improving both its profit margins and its product offerings, although the economic backdrop remains tough, as some younger patients delay elective surgery, he added. In order to win over management, however, J&J would have to increase its price.

"For a change of control premium, I would look to have anything up to 10 pounds on this," Neophytou said. "Anything short of 9 pounds, I find it difficult to see shareholders taking."

J&J and any other established orthopaedics group would, however, face potential competition problems from buying S&N.

"The key issue in this event is untangling the potential antitrust issues that will raise their head regarding the respective position in orthopaedic surgery both in the U.S and in Europe," said Mike Mitchell at stockbroker Seymour Pierce.

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For statistics on M&A: r.reuters.com/kyb46q

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OVERSEAS CASH

A bid for S&N from J&J or another rival would be the latest in a growing trend of deal-making in the healthcare sector, where companies are seeking to achieve economies of scale to cope with an increasingly tough market.

Bankers believe the sector is on course for a robust year of mergers and acquisitions, as a range of companies look to external sources of growth.

An additional incentive for U.S. companies is that buying foreign companies such as S&N is an attractive use of overseas cash, which would be heavily taxed if repatriated.

The shares of J&J, which is under pressure to improve its performance following repeated recalls of its consumer products in the past year, were flat in pre-market dealings.

The U.S. group last month promoted the heads of its medical device unit and its pharmaceuticals division to vice chairmen, in a move that could put them in competition to succeed Chief Executive and Chairman William Weldon. [ID:nN15131817] (Additional reporting by Susan Kelly in Chicago and Deena Beasley in San Francisco; editing by Hans Peters, Jane Merriman and Andre Grenon) ($1=.6427 pounds)