Leading medical devices player Medtronic (MDT) has decided to sell its Physio-Control business to Bain Capital for $487 million in cash. Physio-Control, with nearly 1,000 people employed globally, is a leading provider of emergency medical equipments such as external defibrillators to be used in the treatment of cardio-respiratory and other medical emergencies.
The announcement does not come as a surprise, as the company had as early as 2006 announced its intention to divest this business. But the plan hit a roadblock due to some quality-control issues, which led to a shipment stall. In fiscal 2010, Physio-Control received notice from the US Food and Drug Administration (FDA) that it successfully met quality improvement requirements and resumed full shipment. Thereafter, in February 2011, with the unit’s margins lagging the company average, Medtronic reinitiated its plan to hive off this business.
The transaction, expected to be completed in the first quarter of calendar year 2012, is subject to certain regulatory approvals. Medtronic intends to use a portion of the proceeds to offset any dilutive impact from this transaction to fiscal 2012 adjusted EPS. The segment’s current President, Brian Webster, will continue with his current role, and will become the CEO after completion of the deal.
Bain Capital’s alliance with Physio-Control dates back to 1994, when it acquired the business from pharmaceutical major Eli Lilly (LLY). The business became a part of Medtronic in 1998.
During the most recent quarter, Medtronic’s Physio-Control segment generated $103 million in sales, up 23% year over year. This business recorded strong growth in the pre-hospital market sales as the Lifepak 15 monitor/defibrillator and the Lucas chest compression system continued to take share.
Our Take
We believe the divestment of Physio-Control is a good move by the company as it will help it to focus on its core segments. Besides, the divestiture of this low-margined business would also aid the company’s financials.
Having witnessed several headwinds in its two biggest segments – Cardiac Rhythm Diseases Management and Spinal – Medtronic is trying every means to revive growth. This includes penetration of international markets, portfolio expansion and restructuring initiatives, which should benefit the company over the long term. An uncertain economic climate is also hurting the company’s procedure volume and pricing. As a result, investor focus is now pinned on the initiatives to be undertaken by the new CEO of Medtronic, Omar Ishrak.
We currently have a Neutral recommendation on Medtronic, which also corresponds to the Zacks #3 Rank (Hold) in the long term.
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