A source told financial intelligence company Reorg last week that someone pitched the idea to Medtronic, which would divest LivaNova’s cardiovascular business and “certain MDT cardiac surgery products.”
“Five sector advisors said such a deal would make sense as carving out already marketed products with steady cash flows would likely be an attractive proposition for midsize healthcare private equity firms,” the Reorg report says. “LivaNova could be an attractive target for a large medtech player if it was broken up and specific assets were divested, several industry sources said.”
The source told Reorg that senior executives of both companies were in early talks about the idea.
“While we think that this deal could make sense since it would bolster MDT’s neuromodulation business and since we believe that LIVN is undervalued particularly considering its pipeline, we think it is far from a certainty,” Needham & Co. analyst Mike Matson wrote separately on Friday.
Needham performed a sum-of-parts analysis of LivaNova, which implies that its shares should be worth $75 apiece currently, keeping in mind that Needham has an $88 12-month target for LIVN. Needham believes that LivaNova’s neuromodulation business is worth $2.5 billion for an overall enterprise value of $3.9 billion.
Assuming that Medtronic pays $85 per share for LIVN and divests the cardiovascular business for $1.4 billion, Needham estimates that the deal would be less than 1% accretive to its Medtronic’s earnings per share in 2021. But the deal could prove more accretive over time if any of LivaNova’s three major pipeline projects (vagal nerve stimulation [VNS] for difficult-to-treat depression, heart failure, and sleep apnea) work out.
LivaNova got a powerful ally in its VNS research last week. The company announced that it has added Google’s (NSDQ:GOOGL) Verily to its study of vagus nerve stimulation (VNS) therapy for difficult-to-treat depression. In November, LivaNova said it was giving up on its Caisson Interventional transcatheter mitral valve replacement (TMVR) program and plans to restructure its heart valve business to improve profitability.
The company’s heart valve business represented nearly $130 million in revenue during fiscal 2018 and saw its revenue numbers decline over the last five years, both with biological and mechanical valves, leading to a decision to begin restructuring, according to LivaNova. The company bought out Caisson Interventional in a May 2017 deal worth $72 million, having previously owned a 49% stake in the Caisson.
Spokespeople for Medtronic and LivaNova each said their respective companies do not comment on speculation. Sources told Reorg that Boston Scientific (NYSE:BSX), Johnson & Johnson (NYSE:JNJ) or Edwards Lifesciences (NYSE:EW) might also be interested in LivaNova.
“We think the deal as described above would be positive for MDT,” Matson wrote. “MDT is the market leader in neuromodulation and we estimate that its neuromodulation market share is 43%. MDT offers spinal cord stimulation (SCS), deep brain stimulation (DBS), and sacral neuromodulation (SNM) products but does not offer vagal nerve stimulation (VNS). In contrast, LIVN is the market leader in VNS and we estimate that its neuromodulation market share is 9%. Given this, we believe that VNS would be complementary to MDT’s current neuromodulation business.”
LivaNova investors may not be impressed with the idea of a Medtronic takeover. The company’s shares were down 2.41% to $68.04 in mid-morning trading today.
This article has been updated with a comment from LivaNova.