August 22, 2014 by Brad Perriello
Standard & Poor’s Ratings Services maintains a credit watch on Medtronic over its $43 billion buyout of Covidien, pending Medtronic’s ability to control its indebtedness.
Medtronic (NYSE:MDT) must watch its debt level after it acquiresCovidien (NYSE:COV) if it wants Standard & Poor’s Ratings Services to remove a credit watch from the medical device company’s credit rating.
Medtronic in June agreed to pay some $43 billion to acquire Covidien. Standard & Poor’s yesterday reiterated the AA- rating with “negative implications” it put out June 14, after the deal was announced, but said the acquisition will raise the financial risk for Medtronic.
“We expect a 1- or 2-notch downgrade and we expect to lower our short-term rating to ‘A-1’ if the transaction is consummated as expected,” the ratings agency said.
“The proposed transaction strengthens Medtronic’s scale, product diversity, and market position, and could represent an additional competitive advantage for the company, offset by a considerable increase in financial risk,” S&P analyst David Kaplan said in prepared remarks. “We estimate Medtronic’s reduced cash combined with the debt being assumed from Covidien, and the additional debt to be issued would increase Medtronic’s pro forma adjusted net leverage to about 2x to 2.2x at close from about 0.7x.”
