Citing the high price of bets on Covidien’s share price declining, the news service reported that investors worry that Medtronic will follow Walgreen’s example and abandon the inversion portion of the deal, which would see Medtronic re-incorporate as an Irish entity subject to that country’s lower corporate tax rate.
"After Walgreen, there is more risk around inversions," Jim Strugger, a derivatives strategist at Stamford, Connecticut-based MKM Holdings LLC, told Bloomberg.
"One concern is that Medtronic will walk away and not do the transaction if inversion legislation goes through," added BMO Capital Markets managing director Joanne Wuensch. "The other is that, if the transaction goes through, it may be in a form that’s not as economic or appreciative."
The merger agreement, now slated to go through by early 2015, is subject to an $850 million breakup fee if Medtronic decides to scuttle the deal. Brean Capital analyst Jason Wittes told the news service that although Medtronic can afford to pay that freight, he’s betting on a consummation.
"Medtronic certainly has the wherewithal to pay that, but I still anticipate this deal closing," Wittes said. "It will be a little more challenging if regulations change, but my sense is this is still going to happen."
Medtronic CFO Gary Ellis has said that Medtronic would do the Covidien deal with or without its inversion aspects, but would reevaluate if the U.S. government moves to outlaw inversions. Bloomberg calculated that the bearish options activity means there’s a roughly 63% chance the deal will go through as planned.