Medtronic Adjusts Covidien Deal Financing

Medtronic Inc. intends to use roughly $16 billion in external financing to complete the acquisition of Covidien plc rather than using cash from its foreign subsidiaries as previously planned. All terms and conditions of the definitive agreement reached between the two companies in June remain unchanged.

To fund the cash portion of the transaction, Medtronic now intends to use new financing expected to be in place by closing of the transaction. As announced in June, upon completion of the transaction, each outstanding ordinary share of Covidien will be converted into the right to receive $35.19 in cash and 0.956 of an ordinary share of Medtronic plc, the parent company of the new combined entity.

Deal remains worth close to $43 billion as originally announced.

“This proposed acquisition was conceived and undertaken for strategic reasons and is intended to create a company that can treat more patients, in more ways and in more places around the world,” said Omar Ishrak, chairman and CEO of Medtronic. “We believe our combination will be uniquely positioned to help advance the goals of the Affordable Care Act in the U.S. as well as the objectives of virtually all health systems – to drive access to high-quality, affordable healthcare for patients around the world. Since the announcement of this transaction, we have worked closely with our Covidien colleagues to plan for the integration of these two leading companies, and we look forward to closing the transaction and realizing these strategic benefits.”

Despite the additional expense of the new financing, the transaction still is expected to be accretive to Medtronic’s cash earnings in FY2016, the first full fiscal year, and significantly accretive thereafter. The transaction is also expected to be neutral to GAAP earnings by FY2019 and accretive thereafter. The change in financing does not affect Medtronic’s FY2015 revenue outlook and earnings per share guidance, as the company’s outlook and guidance does not contemplate the expected closing of the Covidien transaction. Medtronic expects the transaction to close later this year or early next year.

As provided in the June 15 transaction agreement, a new Irish holding company—Medtronic plc—will serve as the parent company of the new combined entity and will be listed on the New York Stock Exchange. The company will maintain principal executive offices in Ireland and operational headquarters in Minneapolis, Minn., where Ishrak and other top execs will be based.

The Medtronic-Covidien deal is one of the largest among the flurry of tax inversion deals that have drawn backlash from the American public and the U.S. government. Acting on President Obama’s orders to limit the controversial deals, the U.S. Treasury Department recently announced new tax restrictions that would make it harder and more expensive for U.S. companies to reincorporate abroad.

The measures include the prohibition of financial maneuvers called “cash boxes” and “spinversions,” and they would prevent “hopscotch” loans that allow American firms to access foreign cash without paying U.S. taxes.

“This action will significantly diminish the ability of inverted companies to escape U.S. taxation,” U.S. Treasury Secretary Jacob J. Lew said after the department’s announcement, according to Republican American. “For some companies considering deals, today’s action will mean that inversions no longer make economic sense.”

The measures include the prohibition of financial maneuvers called “cash boxes” and “spinversions,” and they would prevent “hopscotch” loans that allow American firms to access foreign cash without paying U.S. taxes.

“This action will significantly diminish the ability of inverted companies to escape U.S. taxation,” Treasury Secretary Jacob J. Lew said after the department’s announcement, according to Republican American. “For some companies considering deals, today’s action will mean that inversions no longer make economic sense.”