Medtronic Says Covidien Deal Will Go Forward, But Changes Financing

MINNEAPOLIS (Minneapolis Star Tribune/MCT) -

Shares of medical-device giant Medtronic Inc. jumped Friday on news that the company intends to complete its controversial deal to buy a Dublin-based health-care company and move the combined company overseas.

Fridley, Minn.-based Medtronic said Friday morning that it will use traditional borrowing rather than $14 billion in cash held overseas to buy Dublin-based surgical supplier Covidien, eliminating one of the key tax benefits of the deal. The decision follows the announcement of new federal tax rules last month designed to discourage companies from doing deals like Medtronic’s, which will be the biggest acquisition in the company’s history.

The $42.9 billion deal is expected to close sometime after Nov. 15. All other terms of the deal remain unchanged, the company reported. Covidien shareholders will still receive $35.19 in cash plus 0.956 shares of the new Medtronic for each Covidien share, and Medtronic shareholders will still have to pay capital-gains taxes on their old shares when the deal is completed and they get shares of a new entity, Medtronic PLC.

Medtronic’s deal is the second-largest of at least eight pending corporate inversions, behind North Chicago, Ill.-based AbbVie’s $54 billion deal to buy Dublin-based health-care firm Shire. Inversions like these have stirred up opposition from shareholders and Democrats in Washington because they put the combined company under new parent corporations based in countries with lower tax rates. Critics say such plans are un-American and drive up the taxes for other taxpayers.

Defenders say companies are only reacting to incentives built into a broken U.S. tax code. The United States has one of the highest corporate-tax rates in the world, and is the sole industrialized nation that continues to tax foreign-earned income of domestic companies.

Last month, Treasury Secretary Jacob Lew announced that U.S. companies would start to be taxed on so-called “hopscotch” loans, which are designed to avoid U.S. taxes by loaning cash held offshore among corporate subsidiaries without bringing it back into the United States. Medtronic has strategically stockpiled $14 billion in cash earnings overseas, and had intended to use it as the cash portion of the Covidien deal, while avoiding $3.5 billion to $4.2 billion in U.S. taxes. Instead, it will use a total of $16 billion in traditional borrowing to finance the deal.

“Treasury succeeded in ensuring that the (Medtronic) cash could not be accessed tax-free,” said tax consultant Robert Willens, former managing director of equity research for Lehman Brothers.

Willens predicted that other companies considering tax-avoidance strategies similar to Medtronic’s would turn to external financing rather than trying to avoid U.S. taxes on existing assets.

On Friday, Medtronic shares rose $2.22, or 3.5 percent, to $65.02; and Covidien shares jumped $5.08, or 5.7 percent, to $93.89.