Needham analysts published a report singling out the diabetes and spine businesses as possible spinoff options for Medtronic (NYSE:MDT).
Mike Matson, David Saxon and Joseph Conway of Needham pointed to previous comments from Medtronic management that indicate the potential for changes in the coming year, with a spinoff of a large business within Medtronic considered to be an option.
When asked on the company’s second-quarter earnings call in November 2021 if there was intent to spinoff Medtronic’s diabetes arm, Chairperson and CEO Geoff Martha said there were no current plans, but the executive committee at the medtech giant was spending “a lot more time” looking at portfolios and capital allocation to “make sure we’re the right owner.”
On the company’s third-quarter call in February, Martha said portfolio management and capital allocation processes have been “enhanced,” leading to the potential for changes in the company makeup.
“Our new operating model is giving us line of sight into what is required to compete and win over the long-term in each of our businesses,” Martha said. “As a result, we’re looking at our portfolio with a more critical eye, with a focus on growth and creating shareholder value. I’d be surprised if there weren’t changes over the coming fiscal year, but I don’t know yet if they will be smaller or more significant.”
The Needham analysts said there may be smaller businesses or product lines in Medtronic’s sights for exiting, but the two large businesses that look most likely to be spun are diabetes and spine, coming on the heels of BD’s Embecta diabetes spinoff and Zimmer Biomet’s new standalone spine spin, ZimVie.
“We have analyzed potential spin-offs of these businesses and conclude that neither would unlock immediate shareholder value since we believe that the sum-of-parts of the RemainCo and SpinCo would be slightly below the current value of MDT (largely due to dis-synergies),” the analysts wrote. “However, a spin-off might still eventually create value over time by allowing the SpinCo to be more focused, reinvest in its own business, and better control its own destiny.”
The analysts concluded that, of the two main candidates, diabetes looks the most likely for the spinoff, although there have been indications that Medtronic may look to stick with it.
“Given its recent underperformance, FDA warning letter, and different customer base and sales channel from the rest of MDT, we believe that the diabetes business ranks high on the list of potential portfolio moves by MDT,” Needham analysts said. “However, we note that management has hinted about significant pipeline programs in diabetes, and we believe that the business has potential to become accretive to MDT’s overall revenue growth, so management may choose to continue with the turnaround effort.”
