Covidien, Medtronic Shareholders Poised for January Vote

 

 

Medtronic Inc. (MDT) has committed to closing its $42.9 billion purchase of rival medical device maker Covidien plc (COV) in early January, ending chances that the deal could close this year.

The companies continue to need approval from competition authorities in the U.S., Europe and China. Shareholders of both companies are scheduled to vote on the transaction Jan. 6. Plans for the Jan. 6 votes were announced in definitive proxy statements sent to shareholders Friday.

Medtronic CFO Gary Ellis would not give a specific prediction of when the deal would close during the company's second quarter earnings call Nov. 18, but told analysts that setting of the shareholder votes was a good indication that company officials expect to be able to close very early in the new year.

The merger agreement requires the parties to close the deal no later than June 15, 2015.

"As far as we are concerned, they are all on track," he said. "There are still steps to kind of go through. But the fact that we called the shareholders meeting, we've got a date for it says that we've got some confidence that this will flow according to our original projections but it isn't done yet."

Scheduling of the shareholder vote ends any chance that the transaction will close in 2014. Medtronic officials' last previous public comments on timing indicated they held some hope of closing the deal this year.

At Medtronic's annual Science & Technology Conference Oct. 28, senior vice president of business development and the merger's chief integration officer Geoff Martha, said that regulatory delays were slowing the closing of the deal but there was still some chance they could be obtained by year end.

Approval from the Federal Trade Commission remains pending, but Covidien on Nov. 2 announced that in order to win FTC approval for the deal it would divest its Vascular Therapies product line to Spectranetics Corp. (SPNC) for $30 million in cash. Closing of the Spectranetics transaction is contingent upon FTC approval and completion of the Medtronic acquisition.

Melding the companies' vascular operations is one of the primary reasons for the deal, Medtronic chairman and CEO Omar Ishrak said during the Nov. 18 earnings call. He said plans to fuse Medtronic's drug-coated balloon with the Covidien Peripheral Vascular sales channel will allow the combined operations to "achieve growth beyond what each individual company had planned." Also, the integration of Covidien's neurovascular business into Medtronic's Restorative Therapies Group "will significantly enhance our neuroscience strategy through a more comprehensive product portfolio for neurosurgeons and interventional neuroradiologists."

According to the Nov. 21 proxy, terms of the divestiture require Covidien to supply certain angioplasty balloon catheter products to Spectranetics for at least two years and Spectranetics can renew the supply agreement for an additional year under certain circumstances. In addition, Covidien must provide certain transition services to Spectranetics for up to 2 years, subject to a possible extension as well.

When the U.S. antitrust agencies require divestitures they often insist that the seller provide supply and other services to ensure that the buyer can be a viable competitor.

As a result of the pending divestiture, Covidien has recorded a pre-tax impairment charge of $94 million in its fourth quarter results.

In addition to the U.S., Medtronic and Covidien needed to win regulatory from the European Commission, Canada, China, Israel, Japan, Russia, South Korea, and Turkey. Clearances have already been received from Israel, Japan, Russia and Turkey. The time for Canada's expired with no action being taken by regulators there.

In October, Martha said the biggest wild card in the approval process has been China. He predicted that U.S. and EC clearance would come by early December.

China's Ministry of Commerce, which has a relatively new and less predicable process, accepted the parties' merger control filing on August 19 and initiated a phase II review September 18. The parties said they are cooperating with the Ministry of Commerce.

In a "town hall" with employees of Medtronic suppliers, Ishrak said that China is a critical market for the combined company.

"China is going to be the biggest healthcare market in the world," he said. "There is no doubt about that and it's just a matter of time, and there's going to be more patients, more Chinese patients we treat than any other kind of patient, and unless we're in China understanding those, and more Chinese physicians that we'll deal with than any other kind of physician, and unless we build those local relationships and we understand that clearly, we'll never win in that market. It's not an easy market. It's — we're uncomfortable because we're not used to it, but we have to win there."

As a result, Ishrak said the Chinese operation will report to him directly.

More from Mergers and Acquisitions

Apple Buys Tesla? Amazon Buys Sears? 3 Dream Mergers That Just Make Sense

Apple Buys Tesla? Amazon Buys Sears? 3 Dream Mergers That Just Make Sense

AT&T-Time Warner Ruling Could Usher in More Healthcare Deals

AT&T-Time Warner Ruling Could Usher in More Healthcare Deals

Dropbox Soars in Third-Straight Record-Setting Session

Dropbox Soars in Third-Straight Record-Setting Session

Decision on AT&T's Merger With Time Warner Marks a Monumental Week for M&A

Decision on AT&T's Merger With Time Warner Marks a Monumental Week for M&A

JPM's Head of North America M&A Wants to Super-Charge M&A and Hire More Women

JPM's Head of North America M&A Wants to Super-Charge M&A and Hire More Women