Covidien Drops as Treasury Explores Ways to Stymie Inversions

NEW YORK (TheStreet) -- Shares of medical device and drug maker Covidien (COV) are falling after multiple media outlets reported that the Treasury Department is looking into ways of curtailing tax inversion deals. Covidien has agreed to be acquired by Medtronic (MDT) in a tax inversion deal.

BACKGROUND: Tax inversions refer to an acquisition of one company, usually officially based in a country in Europe or elsewhere, by a U.S. company, following which the acquiring company becomes domiciled in the same country as the company that it bought. The switch has the potential to significantly lower the acquiring company's tax rate.

WHAT'S NEW: The Treasury Department is looking at options that would enable the Obama administration to curtail inversion deals without authorization from Congress, multiple media outlets reported last night and today.

ANALYST REACTION: In a note to investors today, Wells Fargo analyst Larry Biegelsen wrote that he believes that Medtronic would buy Covidien even if the transaction cannot be done as an inversion. At a conference in June, Medtronic CFO Gary Ellis said that his company would "do the deal whether it's an inversion or not inversion," Biegelsen stated. If no inversion is possible, Medtronic would respond by using less of its stock and more debt to fund the transaction, the analyst believes. Such a change would actually cause Medtronic's cash earnings per share to be higher in the first and second year after the deal than under the current structure, the analyst indicated. He kept an Outperform rating on Medtronic.

WHAT'S NOTABLE: Last night, Walgreen (WAG) confirmed that it has exercised its option to complete the second step of its strategic transaction with Alliance Boots and will acquire the 55% in the U,K. drug store company that it does not already own. However, Walgreen said that its management and the board thoroughly evaluated the possibility of combining Walgreens and Alliance Boots under a foreign parent company in an “inversion” transaction, but decided not to pursue such a deal. In its review, the company was "mindful of the ongoing public reaction to a potential inversion and Walgreens unique role as an iconic American consumer retail company with a major portion of its revenues derived from government-funded reimbursement programs," the company noted.

PRICE ACTION: In early afternoon trading, Covidien dropped 2% to $84.50 and Medtronic fell 1% to $61.50. Meanwhile, drug maker Shire (SHPG), which has agreed to merge with its peer AbbVie (ABBV) in a tax inversion deal, is falling 4% to $236.

Reporting by Larry Ramer and Jason Keil.

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