Covidien to Buy GivenImaging, Shares Rise - Analyst Blog

The Irish medical device maker Covidien plc ( COV ) decided to acquire Israel-based diagnostic products maker Given Imaging in order to be a big part of the $3 billion GI (gastrointestinal) market. The news led the stock to go up by 0.1% after the market closed yesterday.

COV will acquire the company for $30.00 per share, totaling $860 million, utilizing its cash balance. Given Imaging, formed in 1998, manufactures products for visualization, monitoring and diagnosis of gastrointestinal problems. Its products are based on technology used for guided missiles.

Given Imaging is famous for designing a camera-in-a-pill, PillCam, which is used as a swallowed capsule endoscope. The addition of Given Imaging's products to Covidien's portfolio serves its strategy to support physicians with products that range from diagnosis to treatment.

The acquisition is expected to be completed by Mar 31, 2014 after COV purchases all Given's shares, including those traded on the Tel Aviv Stock Exchange and the Nasdaq. The boards of both COV and Given Imaging have approved the deal. The shareholders of Given Imaging, with a 44% stake in the company, have voted in favor of the acquisition as well.

The three units of Nochi Dankner's IDB group − Elron Electronic Industries, Discount Investment Corporation, and RDC Rafael Development Corporation - have agreed to divest their stakes in Given Imaging.

Post-acquisition, Given Imaging will be reported as part of Covidien's Medical Devices segment. COV anticipates the acquisition to result in addition of $40 to $50 million per quarter in incremental revenues to the medical devices segment.

On a reported basis, the transaction is expected to be dilutive to operating margin and earnings per share in fiscal 2014. On an adjusted basis, Covidien expects the acquisition to be neutral to both operating margin and EPS in fiscal 2014. However, the acquisition is expected to be accretive to operating margin and EPS both on a reported and adjusted basis in fiscal 2015 and beyond.

Covidien, a Zacks Rank #3 (Hold) stock, posted adjusted earnings per share from continuing operations of 91 cents for the fourth quarter of fiscal 2013, which beat the Zacks Consensus Estimate by a penny. Adjusted earnings also increased 6% from 86 cents reported in the prior-year quarter, despite headwinds from foreign exchange movements, the medical device excise tax and escalated investments in emerging markets.

For fiscal 2013, COV's adjusted earnings per share from continuing operations increased 3% to $3.72, beating the Zacks Consensus Estimate by a penny. However, net income declined 2% to $1,600 million (or $3.40 a share) from $1,637 million (or $3.37 per share) a year ago.

Revenues in the fourth quarter grew 2% (up 5% in constant currency) to $2,560 million, almost in line with the Zacks Consensus Estimate of $2,561 million. On a geographic basis, revenues in the U.S. market decreased 2% to $1,295 million. On the other hand, international revenues climbed 8% (13% in constant currency) to $1,265 million, driven by emerging market growth.

For fiscal 2013, revenues grew 4% to $10,235 million, roughly in line with the Zacks Consensus Estimate of $10,238 million. On constant currency basis, revenues increased 6%.

Covidien has not changed its guidance, provided in the last reported quarter, due to the acquisition. The company expects revenues to grow 2-5% year over year at constant exchange rate (CER) for fiscal 2014. Revenues for the core Medical Devices segment is anticipated to grow in the range of 2-5%, while the same for the smaller Medical Supplies business is likely to remain flat in the fiscal year.

Moving ahead, adjusted operating margin is likely to remain in the band of 21.5-22.5% and effective tax rate in the range of 16.0-17.0%. Moreover, COV is aiming a dividend payout ratio in excess of 35% over time and is targeting to achieve a ratio of at least 30% within the next 12 months.

Some better-ranked stocks in the medical products sector include Hill-Rom Holdings, Inc. ( HRC ), NuVasive, Inc. ( NUVA ), and diaDexus, Inc. ( DDXS ). Hill-Rom Holdings carries a Zacks Rank #1 (Strong Buy), while both NuVasive and diaDexus carry a Zacks Rank #2 (Buy).

COVIDIEN PLC (COV): Free Stock Analysis Report

DIADEXUS INC (DDXS): Get Free Report

HILL-ROM HLDGS (HRC): Free Stock Analysis Report

NUVASIVE INC (NUVA): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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