Medtronic may revise $42.9B deal with Covidien under new tax rules

In light of new U.S. tax rules tightening the reins on corporate inversions, Medtronic ($MDT) could be poised to revise its $42.9 billion deal with Ireland-based Covidien ($COV).

The U.S. Treasury's heightened standards for companies pursuing inversions could make it more expensive for Medtronic to buy Covidien, potentially forcing the Minneapolis-based device giant to take out a $13.5 billion loan instead of using cash held abroad to finance the deal, people familiar with the matter told Reuters. Covidien could also be asked to consider a lower price and to take more stock and less cash to meet the government's new inversion threshold.

While the current arrangement stipulates that Medtronic could walk away from a deal in the event of a U.S. tax law change, the new Treasury guidelines do not satisfy this requirement. Medtronic faces an $850 million breakup fee if it abandons the deal, unless shareholders of either company vote down the pending acquisition.

Medtronic is not the only company dealing with government pushback for corporate inversions. Illinois-based AbbVie ($ABBV) also stands to lose out in its proposed $54.7 billion deal with Dublin drugmaker Shire ($SHPG) under the new tax restrictions, although Medtronic might be the biggest victim of the rules, according to the Reuters story. Treasury's actions specifically target foreign profits held offshore by U.S. multinationals, and Medtronic has about $14 billion of cash held overseas.

And while a potential draw of moving to Covidien's Irish domicile was accessing all of the company's cash without paying U.S. taxes, relying on a loan to finance the deal could undermine profits. Morgan Stanley analyst David Lewis estimated that raising debt would cut earnings-per-share accretion from the deal by 3% to 4%, or 14 to 18 cents per share, Reuters reports. Medtronic will also have to increase the stock component of its cash-and-stock offer under the new rules, handing Covidien shareholders more than 40% of the combined company rather than the 30% outlined in the deal.

Sen. Chuck Schumer

Meanwhile, lawmakers and the Obama administration continue to push for heightened rules for corporate inversions. Earlier this month, Senate Democrats unveiled a bill that would restrict earning stripping, a process in which companies avoid paying U.S. taxes by moving domestic profits to jurisdictions with lower tax rates. The proposal from senators Dick Durbin (D-IL) and Chuck Schumer (D-NY) would reduce the amount of interest deductions a company can claim to 25% from 50% of income, even for companies with finalized inversion deals.

- read the Reuters story

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