Medtronic-Covidien Deal In Final Stages With Antitrust Approvals In Place

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Medtronic (NYSE: MDT) is set to complete the acquisition of Covidien by early next year as it has received all the required antitrust clearances from about a dozen countries. [1] In the last month, the deal has been approved by the U.S. Federal Trade Commission (FTC), the European Commission, the Chinese Ministry of Commerce, the South Korean Fair Trade Commission and the Canadian Competition Bureau. The only approvals pending are from the Irish government, where Covidien is based, and the companies’ shareholders. Shareholder approval is expected to be granted on January 6, 2015, when the shareholder meetings are scheduled to be held in Minneapolis. [2] ((European Commission Clearance Press Release, Medtronic, Nov 26 2014)) ((Chinese Ministry of Commerce Clearance Press Release, Medtronic, Nov 26 2014)) [3]

The medical device major also recently announced a revised financing plan for the acquisition, following a notification by the U.S. Department of the Treasury and the Internal Revenue Service (IRS) discouraging tax-avoiding corporate inversion deals. Instead of using its $14 billion cash held mostly in foreign subsidiaries to fund the $16 billion cash component of the $43 billion deal, the company raised $17 billion from a massive commercial bond offering earlier this month. [4]

The combined Medtronic-Covidien entity, with a presence in more than 150 countries, is expected to drive more value and improve operational efficiency by offering various healthcare and diagnostic products and services as a package to its customers. Covidien generated over $10 billion in revenue in 2013 compared to Medtronic’s $17 billion, with about 50% of sales coming from outside the U.S.

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Our price estimate for Medtronic’s stock is currently around $64, which is about 10% below the market price.

See our full analysis for Medtronic Inc.

Deal Highlights

Financial Benefits: With the Covidien acquisition, Medtronic expects synergies related to optimization of their global back-office, manufacturing and supply-chain infrastructure to result in savings of at least $850 million by FY 2018. It is also likely to benefit from potential revenue synergies with the addition of Covidien’s offerings to Medtronic’s existing product portfolio, in addition to gains from a reduction in its tax liabilities considering that Ireland’s corporate tax rate is 12.5% compared to 35% in the U.S. The medical device maker stated earlier that it expects the transaction to be accretive to its cash earnings in FY 2016 and to GAAP earnings by FY 2018.

Strategic Benefits: Covidien is a global healthcare products company with over 38,000 employees in 70 countries and products being sold in more than 150 countries. It sells a diverse range of products, primarily medical devices and medical supplies. Its medical devices include surgical products, vascular products as well as respiratory and monitoring products. Its medical supplies include monitoring and operating room products, needles and syringes, nursing care, skincare products, hydrogels and animal health products. [5]

Apart from certain vascular and surgical products, there is little product overlap between the two companies. We believe the Covidien acquisition should help Medtronic expand its presence in the minimally-invasive surgical market. Covidien is also likely to help Medtronic in expanding operations in emerging markets, where it has an extensive R&D and manufacturing presence. Medtronic has reported robust sales growth from its emerging market operations in the last few quarters, but there is still considerable room for improvement. Emerging markets including Asia-Pacific, South Asia, Africa and the Middle East currently contribute about 13% of its overall revenues, and this deal is likely to help improve their contribution going forward.

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Notes:
  1. Press Release, Medtronic, Dec 4 2014 []
  2. U.S. FTC Clearance Press Release, Medtronic, Nov 26 2014 []
  3. Medtronic and Covidien Shareholder Meetings Scheduled for January 6, 2015, Medtronic, Nov 17 2014 []
  4. Medtronic Prices $17 Billion in Private Placement of Senior Notes, Medtronic, Dec 1 2014 []
  5. Covidien 2013 Annual Report []