Medtronic to buy Restore Medical

  • Article by: THOMAS LEE , Star Tribune
  • Updated: April 22, 2008 - 8:10 PM

Medtronic will pay $29 million, or $1.60 in cash for each share of Restore Medical, which ran into trouble in the auction-rate securities market.

Medtronic Inc. has agreed to acquire Restore Medical Inc. for $29 million, a deal that rescues the cash-starved company from possible insolvency.

The medical-device giant will pay $1.60 per Restore share, almost three times its closing price Tuesday of 55 cents a share, but well below Restore's Wall Street debut of $8 a share in 2006. No decisions have been made about job cuts or the fate of Restore's senior management team, officials from both companies said.

Restore, based in Roseville, makes medical devices to treat sleep disorders such as snoring and sleep apnea. But the company has struggled in recent years.

It has not been able to obtain Medicare reimbursement for its key Pillar Palatal Implant System, which consists of three polyester implants to stiffen the soft palate.

In February, Restore disclosed that it may of run out of cash beginning in May because of troubled investments in short-term securities.

Medtronic's offer is "as good of an outcome as they could have hoped for in the short term," said Matt Arens, a senior portfolio manager at Edina-based Kopp Investment Advisors. Given the turmoil in the credit markets and Restore's reimbursement problems, the company faced a difficult time raising new capital, he said.

In an interview, Restore Chief Executive Bob Paulson said the deal had nothing to with the company's recent problems with auction-rate securities, short-term debt instruments with interest rates set by an auction every few days or weeks. Until recently, the securities were considered safe investments.

Beginning in February, investors have avoided such securities, causing auctions to fail for lack of buyers. As a result, Restore's auditor warned that "the company currently does not have sufficient capital resources to fund future operations, which raises substantial doubt about the company's ability to continue as a going concern," according to documents filed with the Securities and Exchange Commission.

Paulson said Restore had been discussing a sale to Medtronic "for some time."

The Medtronic deal "presented the greatest value to the company," said Paulson, who owns 10,000 shares of Restore stock. "It's the right strategic decision for our technology and our employees. Adding Pillar to Medtronic ... will accelerate [industry] adoption much faster than we could have done on our own."

Bob Blankemeyer, president of Medtronic's ear, nose, and throat business, said Restore fills a hole in Medtronic's product portfolio. While Medtronic sells products that allow surgeons to remove soft tissue from upper airways, Restore "offers systems that are less invasive, less traumatic and applies to patients that will not have the surgery," he said.

Analysts said Medtronic can provide the necessary machinery to help win Medicare reimbursement for its products.

"Medtronic has a very strong history concerning reimbursement issues," Arens said.

Blankemeyer said Medtronic will focus immediately on "accelerating the clinical business to enhance reimbursements" once the deal closes in 90 days.

But for Restore's long-term investors, the Medtronic deal is bittersweet.

"Certainly a better outcome would have been for the company to secure financing to build up the business, but under the circumstances, this was not a surprising outcome," said Phil Nalbone, an analyst with RBC Capital Markets in San Francisco.

One investor standing to profit handsomely is Wayzata-based Perkins Capital Management. Since October, the company has been buying large amounts of Restore stock at prices below Medtronic's offer of $1.60 a share.

Perkins now owns more than 1 million shares, making it the fourth-largest investor in the company. Based on its stake, Perkins stands to reap $1.6 million from the deal.

Thomas Lee • 612-673-7744

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