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| Medtronic CEO Omar Ishrak |
Now-Ireland's Medtronic ($MDT) said in a filing with the SEC that it is paying $500 million in U.S. income taxes on $9.8 billion in cash and investments that it is moving to the country from overseas subsidiaries. The move sets the stage for more M&A activity. After all, the U.S. is the capital of med tech innovation (if not manufacturing).
Much to the dismay of the feds, the move demonstrates the benefits of tax inversion deals, like Medtronic's $50 billion purchase of Covidien, under which the combined company renamed itself Medtronic PLC and transferred its corporate headquarters to Ireland.
Half a billion dollars sounds like a big number, but it's only a 5% tax rate on the money being brought to the U.S., while companies based in the country must pay a 35% tax to repatriate overseas earnings. So the company saved $3 billion by conducting the transaction under its new corporate structure.
The transaction completes an internal restructuring of legacy Covidien businesses that reduces the cash and investments held by Medtronic's overseas subsidiaries.
"The Restructuring provides Medtronic with additional financial flexibility and increased confidence in the Company's ability to meet its financial commitments, which include continuing to target an 'A' credit profile through a reduction in its debt to EBITDA ratio by the end of fiscal year 2018, returning a minimum of 50 percent of its free cash flow to shareholders through dividends and share repurchases, and pursuing financially disciplined M&A," the company said in the SEC filing.
Leerink equity analyst Danielle Antalffy said the company now has access to $12.5 billion in cash, with $5.5 billion still overseas. "MDT now has the financial flexibility to more easily deliver on all 3 financial commitments (described in the SEC filing), which we believe could set the stage for more aggressive M&A going forward," she wrote in a research note.
Potential targets include left ventricular assist device (LVAD) maker HeartWare ($HTWR) and percutaneous VAD maker Abiomed ($ABMD), she said. Both companies experienced a spike in their stock price following news of St. Jude Medical's ($STJ) impending $3.4 billion acquisition of LVAD maker Thoratec ($THOR). HeartWare is Thoratec's only direct competitor, but suitors will likely wait to found out if the FDA approves its LVAD's bid for an expanded indication. Note that Thoratec already has the expanded indication that HeartWare seeks.
Antalffy said other arenas of interest to Medtronic include minimally invasive surgical devices and imaging technology. "Regardless, we would expect MDT to be more active in M&A over the next 12-18 months now with access to significantly more cash on hand," she wrote.
Some speculated that due to a higher debt burden and effort spent integrating Covidien, Medtronic would reduce its M&A following the inversion deal's close. But they have been proved wrong.
Medtronic just said it will spend $100 million to buy stent retriever cover maker Lazarus Effect. And it will pay up to $458 million for transcatheter mitral valve replacement company Twelve, following the announcement of similar acquisitions by competitors Abbott ($ABT) and Edwards Lifesciences ($EW).
In order to complete the $50 billion purchase of Covidien, Medtronic CEO Omar Ishrak had to overcome public anger and new Treasury Department rules designed to make inversion deals less attractive. He said throughout the process that easier (and cheaper) access to cash outside the U.S. was one of the main rationales of the transaction's structure as a tax inversion deal.
- here's the SEC filing
Special Report: The 10 largest med tech M&A deals announced in 2014 - Medtronic/Covidien