Medtronic PLC is selling a large portion of its hospital supplies business for $6.1 billion in a deal that focuses the medical device manufacturer on higher-tech products while potentially allowing future investments in faster-growing technologies.
Ohio-based Cardinal Health is buying 23 product categories — everything from chart paper to neonatal catheters — and taking on 10,000 employees as part of the deal announced Tuesday.
The products came to Medtronic via its January 2015 megamerger with Covidien PLC. Medtronic surrenders about $2.4 billion in annual revenue plus related earnings, but retains the higher-tech Covidien products that analysts say are a better match with Medtronic’s heart devices, surgical tools and insulin pumps.
“The divestiture will provide Medtronic with balance sheet flexibility to pursue higher-growth initiatives that are more in line with its current focus,” wrote Joshua Jennings, an analyst with Cowen and Co., in a note to investors. “Given investors’ scrutiny of Medtronic’s top-line growth in recent quarters, we view this latest move as strategically sound.”
Based in Ireland, Medtronic has its operational headquarters in Fridley and about 9,500 workers in the state. Historically, the company has operated large businesses selling pacemakers and a related heart device called implantable cardiac defibrillators.
The product lines being sold fall under the heading of “patient care/deep vein thrombosis/nutritional insufficiency” and have been part of Medtronic’s unit for patient monitoring and recovery products. They were acquired in the $48 billion deal for Covidien, which also brought technology for catheter-based medical procedures that are a closer fit with Medtronic’s product lineup, said David Heupel, senior analyst with Thrivent in Minneapolis.
Medtronic said it will use proceeds from the deal to repurchase stock and pay down debt. The funds could also help set up acquisitions of more innovative, higher-tech devices, Heupel said.
In a statement, Medtronic Chief Executive Omar Ishrak said the company determined the patient monitoring and recovery products being sold were better suited to another manufacturer.
“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,” Ishrak said in the statement. “It signifies our commitment to disciplined portfolio management.”
With headquarters in Dublin, Ohio, Cardinal Health sells a variety of medical products to hospitals, health systems and other clinical entities worldwide.
The divested product lines include dental/animal health, blood collection, wound care, incontinence, and electrodes, among others. The transaction includes 17 dedicated manufacturing facilities including one in Wabasha, Minn.
“These are commodity supply businesses that for years now have been run for profitability and cash flow and tend to grow in the low-single digits,” wrote Michael Weinstein, an analyst with JPMorgan Chase, in a note to investors.
Fewer than 100 people work at the Wabasha facility, which makes electrodes. In a news release, Cardinal Health said it expected “synergies” would exceed $150 million annually by the end of fiscal 2020.
“This industry-leading portfolio will help us further expand our scope in the operating room, in long-term care facilities and in home health care,” George Barrett, chief executive at Cardinal Health, said in a statement. “We’re also looking forward to welcoming the more than 10,000 employees across these businesses.”
Currently, Medtronic employs about 88,000 people worldwide.
Under terms of the deal, Medtronic would retain its business in respiratory and monitoring products, including ventilators and certain monitors, plus its renal care solutions business. Both are part of the patient monitoring and recovery division.
“We believe that investors have been largely focused on acquisitions, thus we view streamlining the portfolio as a positive step,” wrote Joanne Wuensch, an analyst with BMO Capital Markets, in a note to investors. “Medtronic can focus its attention and capital on faster-growing projects.”
But Thomas Gunderson, a retired stock analyst who now works at the University of Minnesota’s Medical Industry Leadership Institute, said he believed Medtronic’s primary motive is simply management of what’s become a vast portfolio of products.
Medical devices will still play an important role in Medtronic’s future, Gunderson said. But growth will become more about selling services to hospitals and clinics, he said, such as European medical centers that hire Medtronic to manage catheterization labs where patients undergo minimally invasive procedures.
“It’s gotten so big that there’s not any one new technology that’s going to bend the curve up and give them an inflection point of growth,” Gunderson said of the idea that the divestiture might fund acquisitions.
Closing on the Cardinal Health deal is subject to regulatory approvals. If completed, the transaction is expected to result in an immediate positive impact to Medtronic’s operating margin, the company said.
The deal calls for Medtronic to receive $6.1 billion in cash, subject to certain adjustments, with total after-tax proceeds estimated to be approximately $5.5 billion.
Medtronic intends to allocate $1 billion of the after-tax proceeds to incremental share repurchases in fiscal 2018, with the balance used to reduce its debt.
The transaction is expected to result in “modest dilution,” Medtronic said, on a net basis to the company’s fiscal year 2018 non-GAAP earnings per share in the range of approximately 12 cents to 18 cents, with the exact amount primarily dependent on the closing date of the transaction.
Medtronic shares were down slightly on Tuesday, closing at $80.33. Cardinal Health shares dropped nearly 12 percent, to $72.39.