Medtronic Restructures Its Planned Covidien Purchase

Medtronic Restructures Its Planned Covidien Purchase

Although new Treasury rules will make the deal more costly, the company said the two firms’ plans remained compelling.

Despite recently announced rules aimed at discouraging tax inversions, Medtronic is moving forward with its plan to acquire Dublin-based surgical supplier Covidien for $42.9 billion. But the way it plans to finance the deal has changed.
The Fridley-based medical technology giant announced this morning that it will now use traditional financing, borrowing roughly $16 billion, instead of relying on $14 billion in cash it holds overseas.
Originally, Medtronic planned to use the overseas funds without being hit with a “repatriation” tax on the money, according to The Star Tribune. But the Treasury Department announced new deterrents to such deals last month, among them changing access to so-called “hopscotch loans” and preventing companies from restructuring a foreign subsidiary to get tax-free money.

Shares of Medtronic’s stock climbed 4 percent from $62.77 to $65.61 a share to open today’s trading, and hovered around $65 a share by midday.

“By talking about the debt they will issue to finance the decision also is confirming that this deal is going to go through,” Morningstar analyst Debbie Wang said.
Medtronic said all other terms of the plan—disclosed in June—would be unchanged. To cover the costs of the purchase, Medtronic said it would use new financing expected to be in place upon the deal’s closing. At that point, each outstanding share of Covidien would be converted into the right to receive $35.19 in cash and 0.956 of an ordinary share of Medtronic.
The company said it still expects to close the purchase by late 2014 or early 2015. The Star Tribune reported that the deal is expected to close at some point after Nov. 15.
Medtronic intends to relocate its legal headquarters from Fridley to Ireland, the site of Covidien’s current headquarters. Medtronic has said its “operational headquarters” will remain in the Twin Cities, where it employs more than 8,000 people. The deal would also add 1,000 workers to Medtronic’s Minnesota workforce. Medtronic and Covidien said in a joint press release that they would have 87,000 employees in more than 150 countries following the acquisition. Since it’s announcement, the plan and the U.S. corporate tax system has been subject of much discussion.
At 35 percent, the U.S. has one of highest corporate tax rates in the world and is the only industrialized nation to tax foreign-earned income of domestic companies. Ireland’s 12.5 percent corporate tax rate, meanwhile, is one of the world’s lowest, according to Forbes.
“This proposed acquisition was conceived and undertaken for strategic reasons and is intended to create a company that can treat more patients, in more ways and in more places around the world,” Medtronic CEO Omar Ishrak said in a statement
Despite recent U.S. Treasury rule changes, Medtronic said in a news release that “the strategic benefits of the transaction remain compelling.”

Wang said it appeared Medtronic has worked to be circumspect in its handling of the deal, avoiding any perception that it violated the law.

“Management wants this deal done and doesn't want to do it in a way that attracts a lot of unwanted attention,” Wang said.