Medtronic-Covidien Deal Wins European Commission Go-Ahead - Analyst Blog

Close on the heels of the U.S. Federal Trade Commission (FTC) approval attained last week, the European Commission has also cleared Medtronic Inc. 's ( MDT ) proposed $42.9 billion acquisition of Covidien plc ( COV ), subject to certain conditions. Alike FTC, the European Commission also demands Medtronic's commitment to divest certain assets related to Covidien's drug-coated balloon (DCB) catheter product.

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.

Presuming this move, a subsidiary of Covidien has already entered into an agreement with The Spectranetics Corporation to divest these assets. 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 has 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, following the FTC, the latest European Commission thumbs-up takes Medtronic yet another step closer toward its plan to move its headquarter 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 can consider 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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