MEDTRONIC SQUASHES SMITH & NEPHEW TAKEOVER REPORT (Orthopedics This Week)
Bloomberg reported on June 4, 2014 that Medtronic, Inc. is joining Stryker Corporation in evaluating a purchase of Smith & Nephew plc (S&N). Medtronic management quickly threw cold water on that report at a Wall Street analyst meeting on June 5.
According to “people familiar with the matter,” Bloomberg reported that a takeover could see Medtronic move its tax domicile overseas and give the company better access to its overseas cash.
Medtronic CEO Omar Ishrak, reported Bloomberg, has said he wouldn’t rule out a tax-inversion deal.
“Strategically, we do have this current problem that we have a lot of cash outside the U.S.,” he said in a May 20 telephone interview. “We encourage some kind of U.S. tax reform that allows us access to that cash in a more reasonable way.”
The company is looking to broaden its offerings in its three key areas—heart, muscle and skeleton and diabetes products, Ishrak said. “We intend to fill these areas out and we want to globalize.”
According to the people, Medtronic’s preparations for a bid are at an early stage and no offer is imminent.
“A More Serious Bidder”
The unidentified sources also told Bloomberg that Medtronic is a more serious bidder than Stryker, which confirmed last week that the company was in the early stages of evaluating a bid. Stryker was responding to a request from British regulatory authorities to state their intentions. That regulatory body has not made a similar request of Medtronic, as of this writing.
Analysts at Barclays Plc wrote that buying S&N would bolster Medtronic’s business of making devices for the spine and its orthopedics operations. Medtronic is a more plausible buyer of the UK company than Stryker because Medtronic would have a lower risk of antitrust obstacles, they said.
The transaction, according to people in the Bloomberg article, would probably be structured as a tax inversion, with Medtronic using S&N’s corporate shell to move its legal residence to the UK. The gap between the 35% federal tax rate and much lower levies in some European countries is spurring such deals—including Pfizer Inc.’s now shelved effort to acquire AstraZeneca Plc. The UK has a 21% corporate income tax rate.
Medtronic Throws Cold Water on Speculation
After speaking with Medtronic management at the June 5 analyst meeting, Wells Fargo analyst Larry Biegelsen wrote that he does not believe the company will bid on S&N as reported by Bloomberg.
He noted that British regulators had not asked Medtronic to issue a statement, as they did with Stryker. In addition, he said management indicated that deals will be based primarily on strategic fit and not financial reasons like tax inversion.
Medtronic management indicated to Biegelsen that the company sees a better fit for spine with its neuro business than with ortho. The company will only enter a market if it feels it can be a top player. S&N only has about 12% of the hip and knee market.
The company also indicated to Biegelsen that while it generates the majority of its cash outside the U.S., it believes it can return 50% of cash to shareholders over the next five years without doing a tax inversion. “This suggests to us that the financial rationale for doing a S&N deal is not that compelling for Medtronic.”
Bidding War With Stryker?
Biegelsen had previously said that a Medtronic offer could start a bidding war with Stryker.
Before the analyst meeting, Biegelsen wrote that a potential Medtronic acquisition of S&N could make strategic sense. “Medtronic would benefit from market entry into orthopedics (hip and knee implants), advanced wound management, sports medicine (joint repair), trauma, and arthroscopic enabling technologies. S&N has 12% share worldwide in the hip, knee, and reconstructive orthopedic markets. While Medtronic has a large, established spine business (~$3B), orthopedics and wound management represent gaps in their portfolio.”
Biegelsen also said that if there is a bid from Medtronic, the acquisition would enable broader product bundling opportunities to help the company better meet the demands of a hospital environment increasingly driven by cost cutting. He would, however, be concerned that S&N’s relatively small 12% share in hip and knee implants would put Medtronic at a competitive disadvantage to larger ortho players such as DePuy Synthes and Zimmer Holdings, Inc.
Apparently, so would Medtronic’s management.