Medtronic $42.9bn purchase of Covidien puts Ireland tax rules back in spotlight
US medical device maker Medtronic has agreed to buy Covidien for $42.9bn in cash and stock and move its executive base to Ireland in the latest transaction aiming for lower corporate tax rates abroad.
The deal will allow Medtronic to reduce its overall global tax burden. The Minneapolis-based company said the move was not driven by tax considerations, pointing instead to medical technology synergies with Covidien.
The merger of Medtronic, the world's largest stand-alone medical device maker, and Covidien, a maker of devices used in surgery, will create a close competitor to the medical device business of Johnson & Johnson Co.
The deal values each Covidien share at $93.22, paid for by $35.19 in cash and 0.956 Medtronic shares. This share consideration represents a 29 percent premium to Covidien's closing stock price on Friday, Medtronic said.
The combination, which will leave Covidien shareholders owning about 30 percent of the combined company, is expected to result in at least $850 million of annual pre-tax cost synergies by the end of fiscal year 2018, Medtronic said.
Medtronic said it would keep its operational headquarters in Minneapolis and pledged $10 billion in U.S. technology investments over the next 10 years.
Acquisitions of companies aimed at lowering corporate tax rates, known as inversions, have historically been rare but are becoming more common.
Some U.S. lawmakers are concerned that the deals erode government revenue by giving corporations another tax-avoiding loophole. Two bills in the U.S. Congress and a White House proposal would make inversions harder to do, but neither has gained much traction. That could change if another major U.S. company or two tried to conduct inversions, tax lawyers and analysts said last week.
Two recently attempted inversions failed, but only after they refocused political attention on the tax inversion strategy. U.S.-based Pfizer Inc's bid for rival British drugmaker AstraZeneca Plc was rejected, while the proposed combination of U.S. advertising firm Omnicom Group Inc with France's Publicis Groupe SA collapsed for non-tax-related reasons.
Democrats in Congress have called for new restrictions on these deals, with bills offered by Senator Carl Levin and his brother, Representative Sander Levin, both Michigan Democrats. President Barack Obama has a proposal similar to the Levins’. Republicans have expressed concern about inversions, but have not put forward legislation of their own.
Some lawmakers have said that anti-inversion curbs should be tackled as part of a comprehensive overhaul of the loophole-riddled U.S. tax code, but this is a difficult project that Congress has not tackled since 1986.
Medtronic's deal with Covidien is expected to close in the fourth quarter of 2014 or early 2015, Medtronic said.
Perella Weinberg Partners LP, Cleary Gottlieb Steen & Hamilton LLP and A & L Goodbody advised Medtronic, while Goldman Sachs & Co and Wachtell, Lipton, Rosen & Katz and Arthur Cox advised Covidien. Bank of America Merrill Lynch provided committed financing for the transaction.