FRIDLEY (dpa-AFX) - Medical device maker Medtronic, Inc. (MDT) agreed late Sunday to acquire smaller rival Covidien plc (COV) in a cash and stock deal valued at about $42.9 billion. The deal will help Medtronic shift base to Ireland and save it from paying high U.S. corporate taxes.
The deal will see Dublin, Ireland-based Covidien's shareholders receiving a consideration of $35.19 in cash and 0.956 of an ordinary share of Medtronic plc, implying a total consideration of $93.22 per Covidien share, based on Medtronic's closing stock price of $60.70 on Friday.
The total per share consideration represents a 29 percent premium over Covidien's closing stock price of $72.02 on Friday, the last trading day prior to the announcement.
Covidien noted that the cash and stock deal represents compelling value to its shareholders through the cash component and continued participation in the future growth prospects through their ownership of about 30 percent of the combined company.
In order to execute such tax inversion deals, the shareholders of the acquired company must receive stock amounting to at least 20 percent of the combined entity.
Several U.S. healthcare companies, are increasingly looking at inversions as an option to escape the high rate of corporate taxes in the U.S., which is among the highest in the world, as the U.S. overhauls its healthcare system under the Affordable Care Act. The statutory tax rate in the U.S. is currently 35 percent, while it is 12.5 percent in Ireland.
Some of these companies are sitting on huge cash hoards in their overseas subsidiaries and would be heavily taxed if they repatriated these funds to the U.S. However, U.S. lawmakers are now targeting legislation aimed at curbing U.S. companies from doing inversions.
U.S. drugmaker Pfizer Inc. (PFE) recently made an abortive $116.6 billion takeover bid for British drug maker AstraZeneca plc (AZN, AZN.L) through an inversion. Parsippany, New Jersey-based Actavis plc (ACT) relocated to Ireland through an inversion.
"This acquisition will allow Medtronic to reach more patients, in more ways and in more places. Our expertise and portfolio of services will allow us to serve our customers more efficiently and better address the demands of the current healthcare marketplace," Medtronic Chairman and CEO Omar Ishrak said in a statement.
Medtronic, which makes products ranging from stents and heart defibrillators to insulin pumps, has a market value of about $61 billion. Covidien, a maker of devices used in surgery such as surgical staples, feeding pumps and ventilators, is valued at about $32 billion.
The deal will create the world's premier medical technology and services company with a comprehensive product portfolio and broad geographic reach, with 87,000 employees in more than 150 countries, that will accelerate Medtronic's core strategies of therapy innovation, globalization and economic value.
The deal, unanimously approved by the boards of directors of both companies, is expected to close in the fourth calendar quarter of 2014 or early 2015.
The closure of the deal is primarily subject to approvals by Medtronic and Covidien shareholders as well as regulatory clearances in the U.S., the E.U., China and certain other countries.
Minneapolis, Minnesota-based noted that the deal is expected to be accretive to its cash earnings in fiscal 2016, the first full fiscal year of combined operations, and significantly accretive thereafter. The deal is also expected to be accretive to GAAP earnings by fiscal 2018.
Additionally, the combination of the two companies is expected to result in at least $850 million of annual pre-tax cost synergies by the end of fiscal 2018.
Medtronic noted that the combined company will generate annual revenues of $27 billion, with $13 billion coming from outside the U.S., including $3.7 billion from emerging markets. The combined entity will have a comprehensive product portfolio, a diversified growth profile and broad geographic reach, with 87,000 employees in more than 150 countries.
Following the completion of the deal, the businesses of Medtronic and Covidien will be combined under a new entity to be called Medtronic plc. that will have its principal executive offices in Ireland. The combined company will be led by Ishrak, and will continue to have its operational headquarters in Minneapolis.
The closure of the deal will see Medtronic shareholders exchanging each share of stock they own in Medtronic for one ordinary share of stock in Medtronic plc.
Further, Medtronic has committed to make additional $10 billion in technology investments in the U.S. over the next 10 years in areas such as early stage venture capital investments, acquisitions and R&D, as a result of its new financial structure.
COV closed Friday's regular trading session at $72.02, down $0.02 or 0.03% on a volume of 0.83 million shares, and MDT closed at $60.70, up $0.09 or 0.15% on a volume of 2.09 million shares.