Medtronic-Covidien deal vulnerable to new US rules

Time of article published Sep 30, 2014

Share this article:

MEDICAL device maker Medtronic is likely to try to renegotiate the structure and terms of its $42.9 billion (R481.3bn) deal to buy Ireland’s Covidien in response to new US tax rules, according to people familiar with the situation.

The US Treasury last week reduced the ease and benefits of US companies buying foreign rivals so they can move their tax domicile abroad, a practice known as inversion. Concerns that US companies were using the strategy to avoid paying taxes spurred the action.

The new rules make it more expensive for Medtronic to buy Covidien by potentially requiring it to take out a loan instead of using cash held abroad, according to the people familiar with the matter and an analysis of the contract.

Covidien, which originally approached Medtronic, could be asked to consider a lower price and to take more stock and less cash, the people said. Increasing the stock component of the deal would be needed to meet the new government threshold for an inversion and resulting dip in US taxes.

It remains unclear how receptive Covidien will be to that possibility. It has some leverage, since Medtronic faces an $850 million breakup fee if it abandons the deal.

While Covidien allowed Medtronic to walk away from a deal in the event of a US tax law change, the new Treasury guidelines fall short of a US law change. If shareholders of either company vote down the deal, there is no breakup fee.

Medtronic did not respond to requests for comment, but it said last week that it was studying the Treasury’s actions and would release its position following a review.

Covidien could not immediately be reached for comment.

The allure of smaller tax bills in countries such as Ireland and Britain has prompted at least 10 US companies to attempt inversions this year, a record.

Medtronic and AbbVie, which has agreed to buy Dublin drug maker Shire for $54.7bn, are both subject to the new restrictions, raising questions about this year’s two largest announced inversions.

Lawyers and bankers say Medtronic appears to be the biggest victim of the rules, not only for the size and structure of its deal, but also given the fact that a key target of the Treasury’s actions is foreign profits held offshore by US multinationals. – Reuters

Share this article: