Done deal: Medtronic to buy Covidien for $42.9B

A weekend of media rumors was confirmed on Sunday night. Medtronic ($MDT) said it will purchase Covidien ($COV) in a $42.9 billion deal in cash and stock.

The combined company committed to making a $10 billion technology investment in the U.S. over the next 10 years. That's over and above what the two companies were already planning separately. The investment will go into early stage venture capital, acquisitions and R&D in the U.S.

That's likely to be a move to placate U.S. regulators, because, after the completion of the transaction, Medtronic will have its principal executive offices in Ireland. Acquiring the Irish company will undoubtedly have tax benefits for the resulting company, since the country has a much lower corporate tax rate than the U.S. and Medtronic will be able to run some of its profit through Ireland instead.

The Wall Street Journal, which initially broke the story, noted that Covidien had a 14.7% effective tax rate in 2012 that rose to 21.1% last year, due to outstanding matters with former parent company Tyco. Medtronic had an 18.4% tax rate in 2013.

Currently, Covidien is headquartered in Ireland, while Medtronic is based in Minneapolis, MN, where it employs more than 8,000 people. Medtronic will continue to have its operational headquarters in Minneapolis once the deal closes, which is expected in the fourth quarter of 2014 or early 2015.

The move will further diversify Medtronic by giving it new major device and imaging businesses. The combined company will have 87,000 employees in more than 150 countries.

Based on the prior fiscal year revenues, the combined company had $27.2 billion in revenue. Medtronic noted that of these combined revenues, $13 billion came from outside the U.S. and $3.7 billion as specifically from emerging markets.

In its most recent quarter, Medtronic reported $4.6 billion in revenues. Of this, $2.4 billion (52%) came from its Cardiac and Vascular Group, which includes its cardiac rhythm disease management, coronary, structural heart and endovascular businesses; $1.7 billion (38%) from its Restorative Therapy Group, which includes the spine, neuromodulation and surgical techniques business; and the remaining $460 million (10%) came from the Diabetes Group, which markets insulin pumps and glucose sensors.

For its part, in the most recent quarter Covidien had $2.6 billion in revenues from surgical solutions ($1.2 billion or 47%), respiratory and patient care ($976 million or 38%), and vascular therapies ($409 million or 16%).

The deal values Covidien at $93.22 per share based on Medtronic's most recent close of $60.70. The deal price is a 33% premium to Covidien's June 13 close. Per share, Covidien shareholders will receive $35.19 in cash and 0.956 of an ordinary Medtronic share. Covidien shareholders will end up owning about 30% of the resulting company.

The transaction is expected to be accretive to Medtronic cash earnings in fiscal 2016 and significantly accretive thereafter. The combination is expected to result in at least $850 million in annual pre-tax cost synergies by the end of fiscal 2018. This will come from global back-office, manufacturing and supply-chain cuts as well as eliminating the dual costs of being a public company.

Bank of America Merrill Lynch committed financing for the transaction, but further details have yet to be disclosed. Medtronic had $14.2 billion in cash on April 25, with $4.6 billion of free cash flow in the last fiscal year.

The boards of directors of both companies have approved the deal, but it will also need to be approved by shareholders of both companies. The transaction will also have to clear regulators in the U.S., EU, China and other countries.

Management from Medtronic and Covidien will hold a conference call on Monday at 8 a.m. ET to provide further deal details.

- here is the press release announcing the deal
- and the WSJ story

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