Shares of Covidien plc (COV) have risen 5.5% till the market closed yesterday as medical technology giant, Medtronic Inc. (MDT) unveiled a new financing plan on Oct 3 to acquire the Irish rival. Shares of Covidien, in fact, hit a new 52-week high of $95.29 following the announcement.
Medtronic revealed that it will no longer utilize cash from its foreign subsidiaries, as previously planned, but an external debt of $16 billion to finance the part of its $42.9 billion Covidien acquisition deal.
In early June, Medtronic announced plans to acquire Covidien. Medtronic’s rationale behind the merger is to offset the impact of high U.S. corporate tax rate by shifting its tax base overseas, to Ireland. Subject to certain customary conditions, the acquisition is expected to close in the fourth quarter of 2014 or early 2015.
Post-merger, the combined entity will be known as Medtronic plc. It will boast a comprehensive product portfolio, a diversified growth profile and broad geographic reach.
The deal has caught the eyes of government officials as Covidien decided to make a new Irish holding company as the parent company of the combined entity, Medtronic plc, which will be listed on the New York Stock Exchange. The deal will help Covidien cut its corporate tax bill and gain overseas cash to invest in the U.S. without paying taxes.
On successful completion of the transaction, Medtronic plc is expected to report at least $850 million of annual pre-tax cost synergies by the end of fiscal 2018. The acquisition is expected to be accretive to Medtronic’s cash earnings in 2016, and significantly accretive thereafter. It is also expected to be neutral to Medtronic’s GAAP earnings by 2019 and accretive thereafter.
Recently, Covidien announced a double-digit increase in dividend for the sixth year in a row. The medical devices maker increased its quarterly dividend payment by 12.5% to 36 cents per share from 32 cents. The increased dividend is payable on Nov 6, 2014, to shareholders of record as on Oct 7, 2014.
With the rise, the annual dividend payment rose to $1.44 from $1.28 per share. Covidien last increased its dividend by 23.1% to 32 cents from 26 cents per share in October last year.
The dividend increase is the maximum amount set under the Medtronic transaction agreement. Covidien would not be able to increase the dividend payment further without prior consent from Medtronic.
Covidien carries a Zacks Rank #4 (Sell) while Medtronic has a Zacks Rank #3 (Hold). Some better-ranked stocks in the medical products industry include ICU Medical, Inc. (ICUI) and ZELTIQ Aesthetics, Inc. (ZLTQ). Both of them sport a Zacks Rank #1 (Strong Buy).
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