Medtronic-Covidien Deal Nears Finish Line, Approvals Flow In - Analyst Blog

Medtronic Inc. 's ( MDT ) proposed $42.9 billion acquisition of Covidien plc ( COV ) is in its last leg as regulatory go-aheads continue to usher in. Medtronic recently announced that it has received the nod from the Chinese Ministry of Commerce as well as the South Korean Fair Trade Commission.

Last week, close on the heels of the U.S. Federal Trade Commission's (FTC) approval, the European Commission also cleared the Covidien acquisition deal, subject to certain conditions. Alike FTC, the European Commission demanded Medtronic's commitment to divest certain assets related to Covidien's drug-coated balloon (DCB) catheter. Presuming this move, a subsidiary of Covidien has already entered into an agreement with The Spectranetics Corporation to divest these assets.

Earlier, in a separate development, Medtronic and Covidien had entered into a parallel consent agreement with the Canadian Competition Bureau on divestiture of Covidien's DCB catheter. The Canadian regulator has also given a green signal to the transaction.

According to Medtronic, with all these go-aheads, all necessary antitrust clearances have now been obtained. The transaction is expected to complete soon after the closure of the acquisition (expected in early 2015). The buyout is still subject to the clearance of regulators and authorization from Ireland, where Covidien is headquartered. In addition, both companies' shareholders should also approve this deal for it to materialize.

We take note that, in order to offset the impact of a high U.S. corporate tax rate (35%), in Jun 2014, Medtronic had announced plans to acquire its Irish rival Covidien. According to Medtronic, this will enable the company to shift its tax base (termed as 'inversion') to Ireland (which has a mere 12.5% corporate tax rate).

However, in September, the U.S. Treasury Department announced its first steps to curb tax benefits being availed through corporate inversions, underlining a set of new rules effective immediately. While many Pharma and Medtech majors are canceling their offshore deals following this new rule, Medtronic has decided to proceed with the same. This indicates that the company is reasonably confident of a successful integration coupled with high growth synergy that is likely to emerge from the impending Covidien acquisition.

Medtronic revealed a new financing plan post the announcement of the tax reform. Per the new strategy, it will no longer utilize cash from its foreign subsidiaries, as previously planned, but will use an external debt of $16 billion to finance part of the Covidien deal.

We believe the latest thumbs-up from the regulatory bodies in China and South Korea takes Medtronic more close toward its plan to move base to Ireland, and subsequently enjoy the fruits of a lower tax rate.

Currently, Medtronic carries a Zacks Rank #3 (Hold). However, investors interested in the medical products industry may consider better-ranked stocks like ICU Medical, Inc. ( ICUI ) and OraSure Technologies, Inc. ( OSUR ), both sporting a Zacks Rank #1 (Strong Buy).

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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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