Covidien To Divest Assets Before Medtronic Merger

By Jof Enriquez,
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Covidien plans to sell some assets that are part of its Vascular Therapies line ahead of its planned merger with Medtronic, which is expected to close later this year or in early 2015.

According to an October 20 filing with the SEC, Covidien wrote that a “non-cash charge was required for the impairment of non-amortizable in-process research and development projects associated with its Vascular Therapies product line. This determination reflects the probability that the in-process technology will be sold in connection with the acquisition of Covidien by Medtronic.”

Covidien said the move was meant to satisfy regulatory requirements under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. As a result, a one-time pre-tax charge will cost Covidien between $90 million and $125 million in the fourth quarter, according to the company’s filing.

Although Covidien did not specify in the document what product it plans to sell, it would likely eliminate vascular products made redundant by the expanded portfolio of the newly created company.

Post-merger, Covidien’s Peripheral Vascular business, including the Endovascular, Arterial, and CVI units, will join the Aortic and Peripheral Vascular business under Medtronic’s Cardiac and Vascular Group.

Covidien and Medtronic have been tweaking the terms of their merger transaction since the introduction of new tax rules by the U.S. Department of the Treasury that aim to lessen the tax benefits derived by companies that use tax inversion strategies. In a separate SEC filing earlier this month, Medtronic said that it would use approximately $16 billion in loans to fund the cash portion of the transaction, with an interest rate between 4.0 percent and 4.5 percent. The tax changes disallowed Medtronic from using its $13.5 billion cash from abroad to fund the deal.

Despite the additional hurdles and expenses, Medtronic maintains that it is committed to completing the deal.

"This proposed acquisition was conceived and undertaken for strategic reasons and is intended to create a company that can treat more patients, in more ways and in more places around the world," Omar Ishrak, chairman and CEO of Medtronic, said in a press release. "Since the announcement of this transaction, we have worked closely with our Covidien colleagues to plan for the integration of these two leading companies, and we look forward to closing the transaction and realizing these strategic benefits."