$43bn deal helps Medtronic cure tax ills

Published Jun 17, 2014

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Michelle Fay Cortez and David Welch Minneapolis and Detroit

Medtronic, the second-largest maker of medical devices, has agreed to buy Covidien for $42.9 billion (R458bn) in cash and stock as it transforms into a broader-based company bolstered by new tax advantages.

Medtronic would pay the equivalent of $93.22 for each share of Dublin-based Covidien, or about 29 percent more than Covidien’s New York closing price of $72.02 on Friday, the companies said on Sunday.

The combined company, called Medtronic, will be based for tax purposes in Ireland.

The deal gives the US firm access to Covidien’s portfolio of hospital supplies and adds size and scope that may allow it to better compete with Johnson & Johnson, the largest medical device company.

At the same time, use of Covidien’s Irish address could free almost $14bn in cash Medtronic now holds overseas as a way to avoid being taxed on it under US laws.

The primary motivation was “strategic and operational alignment”, Medtronic chief executive Omar Ishrak said on Sunday. “It will drive better value for patients and customers around the world.”

Covidien shares were 38 percent higher at e72.57 (R1 048) in Frankfurt at 3.10pm. By the same time Medtronic had climbed 3.8 percent to $64.50 in pre-opening trade in New York.

Medtronic’s tax rate would remain about the same, even after the company redomiciled in Dublin, Ishrak said.

The advantage gained in the deal was that Medtronic would be able to better use profits it made outside the US, which it planned to invest back into the industry, according to Ishrak.

“This is important to stimulate the medical technology industry in the US,” Ishrak said. “We have made a commitment we will deploy at least $10bn over the next decade.”

Medtronic is based in the US state of Minnesota. The state’s governor, Mark Dayton, said he had spoken to Ishrak and had been told Medtronic intended to create more than 1 000 medical technology-related jobs in Minnesota in the next five years.

“We were assured that the company intends to keep its operational headquarters here in Minnesota and that no jobs will be lost here due to this transaction,” Dayton said.

The transaction, which was unanimously approved by the boards of both companies, still needs shareholder approval.

It was unlikely to run foul of US competition laws because the companies’ products had few overlaps, Jason McGorman, an analyst at Bloomberg Industries, said.

The acquisition comes at the confluence of two trends sweeping health care.

Device companies are banding together to gain leverage and prominence on hospitals’ supplier lists, as medical centres cut costs by concentrating their purchases.

At the same time, companies are increasingly looking to move outside the US to allow more use of cash held in overseas operations. Medtronic joins about 44 US companies that have reincorporated abroad or struck plans to do so.

Earlier this year, Pfizer, the largest US drugmaker, briefly proposed acquiring London-based AstraZeneca in a move that might have cut its tax bills by as much as $1bn a year.

Medtronic ranks 14th on a list of US companies with cash held in overseas operations, according to a report by Goldman Sachs. The report said Medtronic had $13.5bn in cash abroad, representing most of its cash reserves. – Bloomberg

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