The Medtronic-Covidien merger is set to proceed, despite recent federal regulation from the U.S. Treasury designed to deter tax inversion deals. Instead of using cash for the deal, however, Medtronic will use debt to finance the acquisition.
Medtronic reaffirmed its commitment to the Covidien deal in a recent press release, which stated that the company will use $16 billion in external debt for the cash portion of the merger. According to the company statement, the “transaction remains strategically and financially compelling,” and the original $42.9 billion deal that the two companies arranged in June remains unchanged.
In the statement, Medtronic CEO Omar Ishrak reinforced the strategic value of 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," Ishrak said in the press release. "We believe our combination will be uniquely positioned to help advance the goals of the Affordable Care Act in the U.S. as well as the objectives of virtually all health systems — to drive access to high-quality, affordable health care for patients around the world.”
Although using debt for the acquisition made the deal more costly, Medtronic maintained in its statement that the deal would boost earnings in fiscal year 2016 and significantly increase earnings after that period.
Originally, Medtronic planned to use cash held abroad to help the new parent company with the deal, but that financial structure conflicted with new U.S. Treasury rules that prevent “hopscotch” loans, according to Reuters. Hopscotch loans essentially enable companies to avoid U.S. taxes by using tax-deferred foreign profits.
While the new federal regulations have complicated the deal, Medtronic still plans to move ahead with inverting the company tax structure, according to Reuters. Under the new deal, both Covidien and Medtronic will be owned by a newly founded parent company — Medtronic plc — which will be listed on the New York Stock Exchange. The new company will be based in Ireland and maintain operational headquarters in Minnesota.
In response to Medtronic’s announcement, financial analysts raised expectations for each company’s shares and dividends. According to Reuters, “Medtronic stock rose 3.6 percent to $65.06, while Covidien gained 5.6 percent to $93.78.”
The deal is expected to close in late 2014 or early 2015.