Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Sometimes, the heart just wants what it wants.

Medtronic, a maker of heart-rhythm devices, announced on Monday that it's paying $1.1 billion for HeartWare International, whose own devices reduce surgical invasiveness when treating patients with heart failure.

The $58-a-share offer represents a whopping 93 percent premium to HeartWare's closing price Friday and is more than 40 percent above where analysts expected the shares to trade in a year -- not to mention, the transaction isn't expected to be accretive for the next three years. Sounds costly -- but it's more of a bargain than those figures may suggest. 

Opportunity Knocks
Medtronic is snapping up HeartWare for $58 a share, 44 percent higher than where analysts expected the stock to trade in a year yet below where it has traded in the past.
Source: Bloomberg

The deal values HeartWare at 4.2 times its trailing 12-month revenue. That's a discount to the 6.6 times sales St. Jude Medical paid for HeartWare rival Thoratec -- a great result, considering Thoratec and HeartWare control the $800 million global ventricular-assist-device, or VAD, market.

Medtronic said this month that its targeted annual M&A spend is $1.5 billion a year. By adding HeartWare to its pending $350 million acquisition of Smith & Nephew's gynecology business, it's nearly at that total. That's not to say its dealmaking days -- now 13 bite-sized acquisitions since the start of 2015 -- are over. Acquisitions are one reason Medtronic's stock reached an all-time high this month. 

Pumped Up
Medtronic's shares are just off their all-time high in part because the company has been growing its sales organically and via acquisitions
Source: Bloomberg

As for HeartWare's shareholders, not all of them are celebrating. The offer price is well below the record $104.66 reached by the stock in January 2014, as well as the 12-month high of $90.71 achieved last July. Even after HeartWare rallied Monday on the deal news, the shares were still more than 20 percent lower than they were a year ago. 

Still, it's a quicker fix than HeartWare's investors were in for, given what analysts were expecting the stock to do on its own amid slowing growth prospects and a delayed clinical trial.

All in all, it looks like a sweetheart deal for both sides.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Using forward sales, the deal multiples are 4.4 times and 5.8 times, respectively for HeartWare and Thoratec.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net