Covidien acquired by Medtronic: fairness opinion by Goldman Sachs and Perella Weinberg Partners
Deal terms
Each Covidien ordinary share to be exchanged for $35.19 in cash and 0.9560 New Medtronic ordinary shares; implied value of $93.22 per share based on Medtronic's $60.70 closing price on June 13, 2014.
Implied value per share by method vs. $35.19 offer
Ranges as disclosed in the banker’s summary of analyses; the red line marks the per-share consideration.
Opinion of Goldman Sachs to the target board
Discounted cash flow assumptions
Standalone Covidien DCF discounted to March 31, 2014. Goldman also performed a pro forma New Medtronic DCF (8.0%-9.0% discount rates, 1.0%-2.0% perpetuity growth) yielding an implied value of the per share scheme consideration of $98.14 to $118.84.
Selected public companies (11)
Baxter International Inc. · Becton, Dickinson and Company · CareFusion Corp. · CR Bard, Inc. · Johnson & Johnson · Medtronic · Abbott Laboratories · Stryker Corp. · St. Jude Medical, Inc. · Boston Scientific Corp. · Zimmer Holdings, Inc.
| Multiple | Peer low | Peer median | Peer high | Range applied | Implied per share |
|---|---|---|---|---|---|
| EV / CY2014E EBITDA | 9.8x | 11.5x | 12.3x | — | — |
| P / CY2014E EPS | 14.2x | 17.2x | 18.4x | — | — |
| P / CY2015E EPS | 13.4x | 15.5x | 16.9x | — | — |
Other analyses
| Analysis | Summary | Implied per share |
|---|---|---|
| Historical Stock Trading Analysis | Implied Transaction Consideration of $93.22 represented premiums of 29.4% to the 6/13/14 close of $72.02, 29.1% to 5/13/14 close, 41.6% to 12/13/13 close, 62.4% to the 7/1/13 close (post-Mallinckrodt separation), 26.6% to the highest closing price since 7/1/13 ($73.66), 29.0% to the 1-month average, 32.7% to the 6-month average and 40.0% to the average since 7/1/13. Also implied 15.8x CY2014E EBITDA (~$3.0bn), 14.4x CY2015E EBITDA (~$3.2bn), 22.5x CY2014E EPS ($4.13), 20.2x CY2015E EPS ($4.61) and 18.1x CY2016E EPS ($5.16). | — |
| Premia Paid Analysis | Median premia for cash-and-stock transactions >$20bn EV announced 6/13/2004-6/13/2014: all industries 26.2% (1-day), 29.4% (1-month), 10.3% (52-week high); healthcare 26.1%, 30.2%, 9.1%. Transaction: 29.4%, 29.1%, 26.6%. Average 1-day premia for cash-and-stock deals >$1bn since 2009: 45% (2009), 43% (2010), 35% (2011), 34% (2012), 23% (2013), 28% (2014 YTD). | — |
| Illustrative Present Value of Future Share Price Analysis - Covidien standalone | Applied NTM P/E multiples of 14.5x to 18.5x to Forecast cash EPS for FY2015-2019, discounted to March 31, 2014 at 9.8% cost of equity. | $62.64–$89.36 |
| Illustrative Present Value of Future Share Price Analysis - scheme consideration | Pro forma blended NTM P/E multiples of 13.5x-16.5x applied to New Medtronic, discounted at 9.4%, multiplied by 0.9560 exchange ratio and increased by $35.19 cash for FY2015-2019. | $94.53–$117.82 |
| Illustrative Potential Per Share Value of the Scheme Consideration | Based on pro forma New Medtronic 2016 cash EPS of $4.99 and NTM cash P/E multiples of Covidien 15.3x, Medtronic 13.8x and New Medtronic 14.3x, multiplied by 0.9560 plus $35.19 cash, discounted to June 15, 2014 at 9.4%. | $93.31–$99.92 |
Transaction fee based on aggregate consideration, estimated at approximately $58 million, all contingent upon consummation. Goldman confirmed its opinion on October 20, 2014 with respect to the Contemplated Funding Structure. During the two-year period ended June 15, 2014 Goldman's Investment Banking Division received approximately $9.0 million from Covidien and affiliates.
Opinion of Perella Weinberg Partners to the acquirer board
Discounted cash flow assumptions
Covidien: Public Forecasts $72-$99 per share ($90-$124 including synergies); Adjusted Covidien Forecasts $80-$110 per share ($99-$136 including synergies). Medtronic: Public Forecasts $54-$72 per share; Medtronic Forecasts $62-$82 per share.
Selected public companies (12)
Abbott Laboratories · Baxter International Inc. · Becton, Dickinson and Company · Boston Scientific Corp. · C. R. Bard, Inc. · Danaher Corporation · Johnson & Johnson · Smith & Nephew plc · St. Jude Medical, Inc. · Stryker Corp. · Thermo Fisher Scientific Inc. · Zimmer Holdings, Inc. (pro forma for Biomet acquisition)
| Multiple | Peer low | Peer median | Peer high | Range applied | Implied per share |
|---|---|---|---|---|---|
| EV / 2015E EBITDA (Covidien) | 9.8x | — | 15.1x | 10.5x–12.5x | $61.00–$74.00 |
| Share Price / 2015E EPS (Covidien) | 13.9x | — | 20.7x | 15.0x–17.0x | $64.00–$73.00 |
| EV / 2015E EBITDA (Medtronic) | 9.8x | — | 15.1x | 9.0x–11.0x | $58.00–$70.00 |
| Share Price / 2015E EPS (Medtronic) | 13.9x | — | 20.7x | 13.0x–17.0x | $53.00–$69.00 |
Selected precedent transactions (12)
| Date | Target | Acquirer | Multiple |
|---|---|---|---|
| 2014-04-24 | Biomet Inc. | Zimmer Holdings, Inc. | 12.2x LTM EV/EBITDA |
| 2014-04-22 | Allergan Inc. | Valeant Pharmaceuticals International Inc. | 23.7x LTM EV/EBITDA |
| 2011-04-27 | Synthes Inc. | Johnson & Johnson | 12.2x LTM EV/EBITDA |
| 2007-05-20 | Cytyc Corporation | Hologic Inc. | 24.1x LTM EV/EBITDA |
| 2005-12-05 | Guidant Corporation | Boston Scientific Corp. | 25.8x LTM EV/EBITDA |
| 2014-02-18 | Forest Laboratories Inc. | Actavis plc | 52.5x LTM EV/EBITDA |
| 2013-04-15 | Life Technologies Corporation | Thermo Fisher Scientific Inc. | 12.6x LTM EV/EBITDA |
| 2011-07-21 | Medco Health Solutions Inc. | Express Scripts Inc. | 11.1x LTM EV/EBITDA |
| 2010-10-04 | Genzyme Corporation | Sanofi-Aventis SA | 26.9x LTM EV/EBITDA |
| 2010-02-28 | Millipore Corporation | Merck KGaA | 17.4x LTM EV/EBITDA |
| 2009-03-09 | Schering-Plough Corporation | Merck & Co. | 11.7x LTM EV/EBITDA |
| 2009-01-26 | Wyeth | Pfizer Inc. | 8.2x LTM EV/EBITDA |
| Multiple | Low | Median | High | Range applied | Implied per share |
|---|---|---|---|---|---|
| LTM EV / EBITDA - medical technology precedents | 12.2x | — | 25.8x | — | — |
| LTM P/E - medical technology precedents | 18.1x | — | 40.8x | — | — |
| LTM EV / EBITDA - other healthcare precedents | 8.2x | — | 52.5x | — | — |
| LTM P/E - other healthcare precedents | 13.5x | — | 78.5x | — | — |
Other analyses
| Analysis | Summary | Implied per share |
|---|---|---|
| Historical Share Price Analysis | Medtronic 52-week trading range approximately $51-$63 versus $60.70 close on June 13, 2014; Covidien 52-week trading range approximately $57-$74 versus $93.22 implied offer price. | $57.00–$74.00 |
| Equity Research Analyst Price Targets | Medtronic undiscounted analyst price targets ranged $57-$70 (median $66, 8.7% premium to 6/13/14 price); Covidien targets ranged $71-$82 (median $80, 11.1% premium). | $71.00–$82.00 |
| Precedent Premium Paid Analysis | Reviewed Dealogic premiums paid since January 1, 2010 for deals >$50 million with >50% stake acquired, grouped by mixed cash/stock, all stock and merger-of-equals, plus a healthcare subgroup. Selected a representative premium range of 20% to 40% applied to Covidien's June 13, 2014 share price. | $86.00–$101.00 |
| Transaction multiples observed | Perella Weinberg observed the transaction LTM P/E of 24.7x and LTM EV/EBITDA of 16.9x, and implied premiums of 29% to Covidien's 30-day VWAP and 29% to Covidien's June 13, 2014 closing price. | — |
Medtronic became obligated to pay $7 million upon delivery of the opinion and agreed to pay an additional $29 million upon closing; expenses reimbursed and indemnity provided. No material relationship with Medtronic or Covidien in the prior two years for which compensation was received.
Management projections
| Projection year | Year 1 | Year 2 | Year 3 | Year 4 | CAGR |
|---|---|---|---|---|---|
| Revenue | $12B | $13B | $13B | $14B | 5.6% |
| Revenue growth | 4.7% | 5.9% | 5.6% | 5.3% | |
| EBITDA | $3.5B | $3.8B | $4.2B | $4.4B | 7.9% |
| EBITDA growth | 10.3% | 8.6% | 10.5% | 4.8% | |
| EBITDA margin | 30% | 30% | 32% | 32% | |
| Implied EV / EBITDA | 15.9x | 14.6x | 13.2x | 12.6x |
Year-1 growth is against LTM at announcement ($11B revenue, $3.2B EBITDA); later years are year over year.
Perella Weinberg reviewed publicly available projections ("Public Forecasts"), internal Medtronic management forecasts ("Medtronic Forecasts"), Covidien management forecasts ("Covidien Forecasts") and an alternative version adjusted by Medtronic management ("Adjusted Covidien Forecasts"), plus Anticipated Synergies prepared by Medtronic management; at Medtronic's direction it used the Adjusted Covidien Forecasts for its opinion, covering the remainder of FY2014 through FY2024 for Covidien and FY2015 through FY2024 for Medtronic. Goldman Sachs used internal financial analyses and forecasts for Covidien and Medtronic prepared by their respective managements and approved for its use by Covidien (the "Forecasts"), together with projected operating Synergies, covering fiscal years 2015-2019. Goldman noted Covidien estimated CY2014 EBITDA of approximately $3.0 billion and CY2015 EBITDA of approximately $3.2 billion, with EPS of $4.13 (CY2014), $4.61 (CY2015) and $5.16 (CY2016), and pro forma New Medtronic 2016 cash EPS of $4.99.
Process notes
Other Medical Devices and Supplies fairness opinions
- CareFusion / Becton Dickinson 2014 · 13.0x EV/EBITDA
- Symmetry Medical OEMS Business / Tecomet 2014 · 8.5x EV/EBITDA
- Medical Action Industries / Owens & Minor 2014 · 13.8x EV/EBITDA
- ArthroCare / Smith & Nephew 2014 · 16.1x EV/EBITDA
- Sirona Dental Systems / DENTSPLY 2015 · 16.2x EV/EBITDA
- Liberator Medical Holdings / C. R. Bard 2015 · 11.5x EV/EBITDA
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