Medtronic (NYSE:MDT) said today that it agreed to deal a portion of its patient monitoring & recovery business to Cardinal Health (NYSE:CAH) for $6.1 billion in cash, confirming months of speculation that the world’s largest medical device maker was looking to slim down.
Rumors that the Fridley, Minn.-based company wanted to divest the supplies business, gained as part of its $50 billion Covidien acquisition, 1st emerged in early February. In March several companies were said to be interested, Dublin, Ohio.-based Cardinal Health among them; earlier this month Cardinal was said to be closing in on a deal. The medical supplies business, which employs more than 10,000 workers, threw off earnings before interest, taxes, depreciation and amortization of approximately $500 million last year.
Today Medtronic said it would divest the patient care, deep vein thrombosis and nutritional insufficiency businesses to Cardinal, which already distributes some of the affected products. The deal, expected to close by the end of Medtronic’s fiscal 2nd quarter in October, is slated to deliver net profits of roughly $5.5 billion, the company said.
“This is a positive transaction for all involved – Medtronic, Cardinal Health, and our respective shareholders and employees – who we believe will all thrive under this change in ownership. In addition, it signifies our commitment to disciplined portfolio management,” chairman & CEO Omar Ishrak said in prepared remarks. “Medtronic has had a specific focus over the past several years on ensuring that we are delivering compelling clinical and economic value to health systems and patients around the world. Ultimately, we came to the conclusion that these products – while truly meaningful to patients in need – are best suited under ownership that can provide the investment and focus that these businesses require. At the same time, we can put these proceeds to work, investing over the long-term in higher returning internal and external opportunities that are more directly aligned with our growth strategies of therapy innovation, globalization, and economic value.”
“We are thrilled about today’s announcement, as this well-established product line is complementary to our medical consumables business and fits naturally into our customer offering. For this reason, this product portfolio has been on our radar for many years,” added Cardinal Health chairman & CEO George Barrett. “We distribute some of these products today and have been collaborative partners with the leadership of this business. Given the current trends in healthcare, including aging demographics and a focus on post-acute care, this industry-leading portfolio will help us further expand our scope in the operating room, in long-term care facilities and in home healthcare, reaching customers across the entire continuum of care.”
The impact: Medtronic
The businesses being sold put up sales of $2.4 billion over the last 4 quarters, Medtronic said. The affected product lines include dental/animal health, chart paper, wound care, incontinence, electrodes, SharpSafety, thermometry, perinatal protection, blood collection, compression and enteral feeding. The deal also includes 17 dedicated manufacturing plants.
Medtronic said it expects the sale to add 50 basis points to both its constant-currency sales growth and adjusted operating margin. Some $1 billion of the proceeds are earmarked for share repurchases during fiscal 2018, the company said, with the balance used to pay down debt. Earnings per share are expected to take a hit of 12¢ to 18¢ during fiscal 2018, depending on when the deal closes, according to Medtronic.
“This transaction enables our group to better focus on a portfolio that delivers on our global strategic priorities,” minimally invasive therapies president Bryan Hanson said in a statement. “We believe both our employees and these businesses will thrive under Cardinal Health’s ownership. We sincerely appreciate the countless contributions of our team throughout the years, as well as the partnership and loyalty of our customers and patients.”
MDT shares were up 1.4% to $81.46 each today in pre-market trading.
The impact: Cardinal Health
For Cardinal Health, which in October 2015 paid $2 billion for Cordis, the Johnson & Johnson (NYSE:JNJ) stent-making arm, the $5 billion Medtronic supplies business would significantly boost its medical device footprint. Financed with cash on hand and a planned $4.5 billion debt offering, the purchase price does not include cash tax benefits of at least $100 million, Cardinal Health said.
Adjusted EPS are expected to show gains from the deal of 21¢ per share during Cardinal’s fiscal 2018 year ending in June of next year, the company said, with another 55¢ expected to accrue during fiscal 2019 and total synergies of more than $150 million a year by the end of fiscal 2020. But the company said it expects adjusted EPS to come in at the bottom of its $5.35 to $5.50 guidance for fiscal 2017.
“Not only is this portfolio complementary to our existing suite of products, it enables us to build further scale on our established global platforms,” medical division CEO Don Casey said in a statement. “We are familiar with the talented team who will be joining us and have worked closely with many of them in the past. We believe this will help us execute an efficient and seamless integration after the transaction closes. These leading products perfectly complement Cardinal Health’s position in a value-based world, bringing additional reach and breadth that build on our existing strengths.”
CAH shares were off -13.2% at $71.00 apiece today ahead of the market’s open.