NEW YORK, June 16 (IFR) - Medtronic Inc bonds were little
changed on Monday, despite news that its US$43bn acquisition of
Covidien could lead S&P to downgrade its AA- rating.
Medtronic's 2.75% 2023s were trading around 70bp bid, close
to their level on Friday before the weekend announcement, said
Jon Sablowsky, partner at Brownstone Investment Group.
"While they may receive a 1-2 notch downgrade, the combined
companies are expected to generate significant free cash flow
and should be able to deleverage without much difficulty," he
Standard & Poor's placed the Minneapolis-based medical
device maker on negative watch Monday.
Per share, Medtronic will pay US$35.19 in cash, plus 0.956
of a Medtronic share, for the acquisition. It will also take on
US$5bn of the Irish company's debt. Covidien shareholers will
own about a third of the combined entity at closing.
"We estimate the reduction in Medtronic's cash, combined
with the Covidien debt being assumed and the additional debt to
be issued, would increase Medtronic's pro forma adjusted net
leverage to about 2x-2.2x at close, from about 0.7x," the rating
It said Medtronic could drop one or two notches, to A+ or A.
Medtronic plans to relocate its headquarters to Ireland,
making it the latest in a string of US companies in the
healthcare and pharmaceutical sectors that have made so-called
'tax inversion' acquisitions of a firm in a country with lower
Medtronic CEO Omar Ishrak said he didn't expect its
corporate tax rate, now at 18%, would change much.
Raj Denhoy, an analyst at Jefferies, thought the deal would
shave 2-3% off Medtronic's corporate tax rate.
Equity analysts applauded the deal for the fact that it
significantly broadened Medtronic's product diversity and
enabled it to better compete for business from hospitals.
S&P, however, said the increased financial leverage
outweighed the positives.
"We believe Medtronic can reduce adjusted net leverage below
two times within two years, but are uncertain about Medtronic's
commitment to doing so," it said.
Given the US$16bn cash outlay for the acquisition financing,
Medtronic will very likely tap the bond market to help
supplement the US$14bn of cash and investments it had on hand at
the end of April.
(Reporting by Danielle Robinson; Editing by Shankar
Ramakrishnan and Marc Carnegie)