Farallon Capital adds a new position in Covidien

Farallon Capital and Covidien

Farallon Capital initiated new positions in Covidien (COV), Hillshire Brands (HSH), and Allergan (AGN). The fund sold its positions in Time Warner Cable (TWC), Dollar General (DG), and SiriusXM Holdings (SIRI). The fund added to its positions in Safeway (SWY) and Coca-Cola Enterprises (CCE), while it lowered its stake in Charter Communications (CHTR) and eBay (EBAY).

Farallon’s new position in Covidien accounts for 2.86% of the fund’s 2Q portfolio.

Overview of Covidien

The Ireland-based Covidien PLC is a global healthcare leader that understands the challenges of providers and their patients and works to address them with innovative medical technology solutions and patient care products. The company operates its businesses through two segments, medical devices and medical supplies.

The medical devices segment includes the development, manufacture, and sale of endomechanical instruments, energy devices, soft tissue repair products, vascular products, oximetry and monitoring products, airway and ventilation products, and other medical products.

The medical supplies segments includes the development, manufacture, and sale of nursing care products, medical surgical products, SharpSafety products, and original equipment manufacturer (or OEM) products.

Fiscal third quarter results beat estimates

Covidien’s fiscal third quarter net sales of $2.69 billion increased 4%, both on a reported and on an operational basis, from the $2.58 billion in the third quarter a year ago. Adjusted diluted earnings per share from continuing operations, excluding special items was $1.04, versus $0.91 a year ago. This was an increase of 14%. Both earnings and revenue came above Wall Street estimates.

The increase in net sales was primarily a result of increased sales volume and product mix, as well as the impact of acquisitions, particularly that of Given Imaging, a developer of gastrointestinal medical devices.

The medical devices segment saw an increase in net sales, while the U.S. medical supplies segment saw a decrease in sales due to a sales decline of enteral feeding products. The segment saw higher sales of SharpSafety products due to a competitive shortage of pre-filled syringes and more favorable pricing.

Covidien and Medtronic merger

On June 15, 2014, Covidien and the Minneapolis-based device maker Medtronic, Inc. (MDT) announced a definitive agreement. Medtronic agreed to acquire Covidien for $42.9 billion in a cash-and-stock transaction.

Each share of Covidien will be exchanged for 0.965 Medtronic shares and $35.19 in cash. The companies expect the transaction to close in late 2014 or early 2015. The transaction requires regulatory clearances in the United States, the European Union, China, and certain other countries.

The rationale for the merger was that it would help the companies expand their portfolio of products available to hospitals. Medtronic will also benefit from lower taxes under the so-called “tax inversion” after it relocates its domicile to Ireland. These deals have come under criticism by the U.S. government. The merger has also seen lawsuits by shareholders of both companies aimed at blocking the merger.

Medtronic said it will now finance the deal through traditional borrowing rather than using $13.5 billion of profits it holds in overseas cash. For more on the deal, please read Market Realist’s article on the Covidien-Medtronic deal.

Covidien acquires Reverse Medical 

Covidien recently acquired Reverse Medical Corporation, a privately held medical device company focused on the management of vascular disease. The company said the acquisition is “complementary to Covidien’s existing portfolio and will allow it to leverage existing vascular technologies to compete in the worldwide vascular embolization market, which is growing at a double digit rate.”

The next part of the series discusses Farallon’s position in Hillshire Brands.