UPDATE 3-Covidien to buy Somanetics for about $299 mln

Wed Jun 16, 2010 12:38pm EDT

* Offer of $25/shr at 32 pct premium over Tuesday close

* Covidien to pay total $250 mln, net of cash acquired

* Deal expected to be completed by July 31

* Somanetics shares up 31 pct (Adds more analyst comments; updates stock movement)

By Esha Dey

BANGALORE, June 16 (Reuters) - Healthcare products company Covidien Plc (COV.N) agreed to buy medical device maker Somanetics Corp SMTS.O for about $298.7 million in cash, to gain access to Somanetics' non-invasive patient monitor that measures blood oxygen levels.

The $25-per-share offer represents a premium of 32 percent over Somanetics' Tuesday closing price and is Covidien's second deal this month after its agreement with ev3 Inc EVVV.O.

"Covidien management has been very straightforward about the game plan, which has been to sell off lower margin businesses and buy higher margin businesses. And they continue to do so," BMO Capital Markets analyst Joanne Wuensch said.

Earlier this month, Covidien had said it would buy ev3 for $2.6 billion to boost its business in stents and vascular devices, while in May it sold off its specialty chemical business for $280 million. [ID:nN0193836]

"This is a higher multiple than they have paid for other assets," Wuensch said, adding that it is hard to predict the right price for a strategic deal.

However, Boenning & Scattergood analyst Greg Chodaczek, who covers Somanetics, said the deal looked slightly expensive for Covidien.

"For 2010, we were expecting Somanetics to post revenue of around $56 million to $57 million, and Covidien is paying around five times of that. We value the companies more at three to four times," Chodaczek said.

Covidien will pay a total of $250 million, including cash acquired, for Somanetics and expects the deal to hurt its 2010 and 2011 earnings.

However, on an adjusted basis, the deal is expected to be neutral to 2010 earnings and slightly add to 2011 earnings.

The transaction, which has been approved by the boards of both companies, is expected to be completed by July 31.

Somanetics' non-invasive patient monitor, called INVOS, continuously measures blood oxygen levels in the brain and body of patients at risk of restricted blood flow so clinicians can detect and correct any complications.

"The Somanetics product line, which we currently distribute in Europe, will expand our presence in the operating room," Covidien's president of respiratory & monitoring solutions Pete Wehrly said in a statement.

Somanetics' shares were up 31 percent to $24.85 on Nasdaq, suggesting investors are expecting the deal to go through without seeing a roadblock or a competing bid.

"The only other companies that we think could be interested in Somanetics would be other large monitoring companies like General Electric (GE.N) or Philips Electronics (PHG.AS) (PHG.N), but this is so small that I don't think they would do it," analyst Chodaczek said.

"So, I don't think there would be another bid for Somanetics," he added.

Covidien shares were trading down about 1 percent at $41.49 Wednesday on the New York Stock Exchange.

"I think the Covidien shareholders have become accustomed to acquisitions. If you hold the stock, (acquisition) is something you should be prepared for," BMO's Wuensch said. (Reporting by Esha Dey in Bangalore; Editing by Aradhana Aravindan, Roshni Menon)

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