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Medtronic Evaluating Takeover of Smith & Nephew

By Matthew Campbell, Manuel Baigorri and David Welch  Jun 4, 2014 2:06 PM MT

Medtronic Inc. (MDT), one of the world’s largest medical-device makers, is evaluating a takeover of London-based Smith & Nephew Plc (SN/) that could see the U.S. company move its tax domicile overseas, people familiar with the matter said.

Smith & Nephew, with a market value of about 9.5 billion pounds ($15.9 billion), is aware of Medtronic’s interest as are investment banks, said two of the people, asking not to be named discussing a private matter. Medtronic’s preparations for a bid are at an early stage and no offer is imminent, the people said.

Medtronic is a more serious bidder for Smith & Nephew thanStryker Corp. (SYK), another U.S. maker of medical devices, said one of the people. Last week, in response to a Financial Times report, Stryker Chief Executive Officer Kevin Lobo said the company was in the early stages of evaluating a bid.

The largest medical-device companies are banding together to compete as hospitals cut costs to accommodate price pressure resulting from the U.S. Affordable Care Act. Medical centers are looking for only a handful of companies to provide a wide range of products, and the leaders of both Medtronic and Johnson & Johnson have said they are looking for scale and planning to bundle their device offerings.

Medtronic rose 3.6 percent to $63.22 at the close in New York, while Smith & Nephew’s U.S.-traded shares climbed 12 percent. In U.K. trading, the stock closed up 3.3 percent. With a market value of more than $63 billion, Medtronic had $14.2 billion in cash and equivalents at the end of April, data compiled by Bloomberg show.

Spokesmen for Medtronic, based in Minneapolis, and Smith & Nephew declined to comment.

Inversion Structure

The transaction would probably be structured as a tax inversion, with Medtronic using Smith & Nephew’s corporate shell to move its legal residence to the U.K., the people said. The gap between the 35 percent federal tax rate and much lower levies in some European countries is spurring such deals — including Pfizer Inc. (PFE)’s now shelved effort to acquire AstraZeneca Plc. (AZN) The U.K. has a 21 percent corporate income tax rate.

Medtronic’s Chief Executive Officer Omar Ishrak has said he wouldn’t rule out a tax-inversion deal.

“Strategically, we do have this current problem that we have a lot of cash outside the U.S.,” he said in a May 20 telephone interview. “We encourage some kind of U.S. tax reform that allows us access to that cash in a more reasonable way.”

Domino Effect

The company is looking to broaden its offerings in its three key areas — heart, muscle and skeleton and diabetes products, Ishrak said.

“We intend to fill these areas out and we want to globalize,” he said.

A purchase of Smith & Nephew, which sells implants for knee and hip surgeries as well as for repairing traumatic injuries, would be the latest in the $45 billion orthopedic market. J&J’s $21.3 billion purchase of Synthes Inc. in 2012 set off a domino effect among the half-dozen rivals that make devices to replace hips and knees, treat sports injuries and bolster the spine.

J&J sold its global trauma business to Biomet Inc. for $280 million to win regulatory approval for the Synthes deal. Zimmer Holdings Inc. (ZMH) agreed to acquire Biomet, its cross-town rival in Warsaw, Indiana, for $13.4 billion in April.

Medtronic’s preparations were complicated by news of Stryker’s interest, one of the people said. Smith & Nephew’s shares have gained more than 7 percent since the May 29 report.

To contact the reporters on this story: Matthew Campbell in London atmcampbell39@bloomberg.net; Manuel Baigorri in London at mbaigorri@bloomberg.net; David Welch in New York at dwelch12@bloomberg.net

To contact the editors responsible for this story: Mohammed Hadi at mhadi1@bloomberg.net; Aaron Kirchfeld at akirchfeld@bloomberg.net Elizabeth Wollman

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Josh Sandberg

Josh Sandberg is the President of Ortho Sales Partners and Partner for The De Angelis Group. He also serves as Co-Founder and Editor of OrthoSpineNews.

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