Medtronic to borrow cash to finance Covidien purchase

Medical-device maker Medtronic announced Friday that it will use $16 billion in new borrowing rather than funds it currently holds overseas to finance the cash portion of its planned acquisition of Ireland-based medical supplier Covidien.

The change in financing is being read in securities markets as a way for Medtronic to sidestep any tax issues that might arise from using overseas funds to partially pay for the acquisition. The total value of the deal, in cash and planned stock to be issued to former Covidien shareholders, is roughly $43 billion.

Once the deal closes in 2015, Medtronic will create a new holding company, Medtronic PLC, which will be based in Ireland. The move is one of a flurry of such deals this year seen by critics as designed to allow the companies to reduce their U.S. tax burden.

In response to such criticism, the U.S. Treasury Department recently issued new regulations designed to discourage the tax inversions. Among the rules is one dealing with companies lending money from overseas subsidiaries to U.S. operations, which could have impacted the original financing plan Medtronic had in place for Covidien.

Covidien has been on a buying spree of its own as it awaits the Medtronic deal to close. In late August, it bought Sapheon, a Morrisville, N.C.-based manufacturer of devices that help treat venous diseases, for an undisclosed amount. Less than a week earlier, it also bought Reverse Medical Corp., a private endovascular devicemaker in Irvine, Calif.

Medtronic reported in August that U.S. sales rose 6% to $2.33 billion, while worldwide revenue was up 4% on a constant currency basis to $4.27 billion in the first quarter of its fiscal 2015, which ended July 25, compared with $4.08 billion in the same quarter a year ago. International sales, which generated about 45% of the company's total revenue, edged up 2% to $1.94 billion for the quarter.

Net earnings, however, were dampened by higher selling, general and administrative costs and restructuring charges during the first quarter. Net earnings fell 9% to $871 million. It reported $41 million in after-tax acquisition-related costs related to the Covidien acquisition.

Follow John N. Frank on Twitter: @MHJFrank