Covidien to ev3: Let’s Make a Deal

Covidien plc has agreed to buy ev3 Inc. for $2.6 billion in a deal designed to expand its presence in the high-margin, fast-growing vascular device market.

Terms of the acquisition call for a Covidien subsidiary to make an all-cash tender offer for ev3 in about 10 days. At $22.50 per share, the deal represents a nearly 19 percent premium for ev3, whose shares have already jumped more than 40 percent this year. Directors and executive officers at ev3 have agreed to tender their shares, as have certain stockholders associated with Warburg Pincus LLC, a global private equity firm that holds about 24 percent of outstanding ev3 stock. Covidien will fund the acquisition through available cash on hand, commercial paper and a fully-committed bridge facility.

Covidien executives expect to close the deal on July 31. Though they touted the “growth benefits” of the merger during a conference call with analysts, executives admitted that significant growth is not expected to occur before 2012. Charles J. Dockendorff, executive vice president and chief financial officer, said the acquisition will most likely reduce non-GAAP earnings in fiscal 2010 by 5 cents to 8 cents per share and in fiscal 2011 by about 10 cents to 15 cents.

Such losses, however, pale by comparison to the anticipated growth in the vascular device market. During the conference call, Covidien executives forecast growth of 6 percent to 8 percent over the next five years for the $3.1 billion peripheral vascular market; and 10 percent to 12 percent growth during that time for the $1.3 billion neurovascular market.

“We believe ev3 brings sustainable long-term opportunities in developed regions as well as advanced treatment opportunities in emerging markets such as Brazil, Russia, India and China,” said Joe Woody, president of Covidien’s vascular therapies unit. “ev3 has the broadest product portfolio in the industry. The opportunity to acquire a strong endovascular lineup in one step was a key reason why we believe ev3 was such a unique opportunity for us.”

And an unexpected one at that. While Covidien has steadily been beefing up its vascular business over the past year, the ev3 deal resulted from a competitive bidding process. Covidien’s chairman and CEO Richard Meelia called the deal “opportunistic.”

“Some of you may be asking, ‘why now?’ “ Meelia told analysts during the conference call. “As we’ve mentioned in the past, acquisitions are opportunistic. When…an asset like ev3 becomes available, a company that fits our growth profile and our strategy of vascular expansion, we owe it to our shareholders to investigate the opportunity. When the right strategic deal comes along, we don’t preclude them.”

Covidien executives haven’t precluded the “right” strategic deals for three years now. Since it was spun off from Tyco International in 2007, Covidien has diversified its product offering, venturing into the medical device, pharmaceuticals and medical supply markets. It has 42,000 employees in more than 60 countries and collected $10.7 billion in revenue in 2009.

Last year, the company created a vascular therapies business unit under the umbrella of its medical devices business in an effort to become a market leader in the endovascular device sector. The creation of that unit coincided with the $440 million acquisition of San Jose, Calif.-based VNUS Medical Technologies Inc. in May 2009. VNUS Medical develops devices for the minimally invasive treatment of venous reflux disease. That acquisition followed the purchase (in March 2009) of Bacchus Vascular Inc., a privately held and venture-backed company selling a system to treat deep vein thrombosis.

Leerink Swann analyst Rick Wise said Covidien’s latest purchase will “dramatically broaden and deepen” its vascular franchise because ev3 develops products in two sectors in which the Ireland-based firm does not participate—peripheral vascular and neurovascular.

While vascular devices that combat heart disease receive more attention, peripheral artery disease (PAD)is much more prevalent, William Blair &Co. analyst Ben Andrew said. “Coronary is ultra-saturated,” he told Reuters. “You have the big boys dominating. PADis less crowded with players.”

To help the company focus on building its vascular business, Covidien executives sold the company’s sleep therapy product line for an undisclosed amount to PHInvest, a privately held company in Luxembourg. The sale is not expected to impact operating income or earnings per share in fiscal 2010 or 2011.