Since Medtronic can’t dip into its considerable foreign cash reserves to buy Covidien, it plans to raise $16 billion domestically toward the $43 billion purchase. Wall Street is not pleased.
In a filing late last week with the U.S. Securities and Exchange Commission, Fridley, MN–based Medtronic said it expects to pay 4% to 4.5% in interest on the debt, which it believes will be in place before the deal closes in late 2014 or early 2015. Medtronic's annual interest payments would tally tens of millions of dollars.
The company had planned to use $13 billion of its own overseas cash and equivalents in a tax inversion deal. In an inversion, a U.S. company avoids paying federal taxes by buying a company in another country and moving its headquarters there.
Medtronic announced in June that it would buy the Irish medtech company and create a new Medtronic based in Ireland, effectively escaping U.S. taxes and raising the ire of the Obama administration.
Standard & Poor’s wasn’t happy with the purchase when it was announced in June, and is even less impressed with Medtronic’s latest move. On June 16, S&P gave Medtronic an ‘AA–’ corporate credit rating and placed it on CreditWatch, pending the acquisition’s completion.
“We now expect to lower the corporate credit rating and the issue-level ratings by two notches, to ‘A’ and to lower the short-term rating to ‘A-1’ if the transaction is consummated as expected,” the independent credit rating company said in its own statement last week.
If the purchase goes as now planned, S&P analyst David A. Kaplan said in the statement that it would produce a stronger Medtronic. But the ratings company is still taking a wait–and–see attitude.
“We expect to resolve the CreditWatch placement upon the consummation of the transaction, or sooner, if we gain certainty that no further changes may occur,” S&P’s statement said.
Medtronic still plans to complete the purchase by late 2014 or early 2015. The company initially predicted it would not affect earnings in fiscal 2018, but has pushed that back to FY 2019.
The initial purchase announcement produced a cascade of events, as Qmed has reported – including an irritated response from the administration of President Barack Obama. Although the U.S. Treasury clamped down on inversion deals, Medtronic has forged ahead in one of the medtech industry’s many recent mega deals.
