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Medtronic Said to Evaluate Takeover of Smith & Nephew

A Worker Assembles a Medtronic Inc. Capsure Sense Lead
A worker assembles a Medtronic Inc. Capsure Sense Lead, a device that is inserted into a heart pacemaker, at Medtronic Singapore Operations (MSO), the company's manufacturing facility in Singapore. Medtronic generates $4.5 billion to $5 billion in free cash flow every year, with 65 percent of it earned outside the U.S., Chief Financial Officer Gary Ellis said in March. Photographer: Munshi Ahmed/Bloomberg

June 5 (Bloomberg) -- Medtronic Inc., the largest maker of heart rhythm devices, is evaluating a takeover of London-based Smith & Nephew Plc 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) based on yesterday’s closing stock price, 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 than Stryker Corp., another U.S. medical-device maker, 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.

Analyst Meeting

Smith & Nephew, which sells implants for knee and hip surgeries as well as for repairing traumatic injuries, climbed 4.2 percent to 1,109 pence at 1:45 p.m. in London. Medtronic rose 3.6 percent to close at $63.22 in New York yesterday. The company has a market value of $63.3 billion and 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. Medtronic is holding a meeting with analysts today in New York. The company won’t comment on potential acquisitions during the event or take any questions on them, Jeff Warren, vice president for investor relations, said at the start of the event.

Buying Smith & Nephew would bolster Medtronic’s business of making devices for the spine and its orthopedics operations, analysts at Barclays Plc said in a report today. Medtronic is a more plausible buyer of the U.K. company than Stryker because Medtronic would have a lower risk of antitrust obstacles, they said.

Domino Effect

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.’s now shelved effort to acquire AstraZeneca Plc. 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.”

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

Hips, Knees

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

A purchase of Smith & Nephew 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. 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.

A deal would make strategic sense for Medtronic, said Derrick Sung, an analyst at Sanford C. Bernstein in New York, in a note to clients yesterday. It would add products for hip and knee replacements, sports medicine and trauma to Medtronic’s spine business, though Smith & Nephew trails as the No. 5 player in the space, he said. Giving Medtronic access to cash it holds outside of the U.S. would also be significant, he said.

Medtronic generates $4.5 billion to $5 billion in free cash flow every year, with 65 percent of it earned outside the U.S., Chief Financial Officer Gary Ellis said in March. The majority of the company’s $14.2 billion in cash resides outside the U.S., as the company would have to pay income tax on the earnings to bring it into the country.

“This seems like a deal that would make sense for Medtronic, especially if they could use it to improve their tax structure,” Sung wrote.

To contact the reporters on this story: Matthew Campbell in London at; Manuel Baigorri in London at; Michelle Fay Cortez in Minneapolis at

To contact the editors responsible for this story: Mohammed Hadi at; Aaron Kirchfeld at Robert Valpuesta, David Risser

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