Facing tax criticism, Medtronic shifts financing in Irish deal

Medtronic will use different financing and proceed with its planned acquisition of Covidien, an Ireland-based medical device maker.

Medtronic will now borrow $16 billion to finance the deal instead of using cash kept overseas, the company said Friday. Had Medtronic used that cash, it would have brought a huge tax bite under new U.S. Treasury Department rules intended to thwart such deals, known as tax inversions.

The Fridley-based corporation faced $3 to $4 billion in U.S. taxes on $12 to $13 billion in overseas earnings that could have been used to help fund the Covidien transaction, said Debbie Wang, an analyst with the investment research firm Morningstar.

"It really comes down to this is the best way they can prevent being taxed on that overseas cash," she added.

• July: Treasury secretary targets overseas deals
• June: Medtronic's Irish deal reopens Minn. tax debate

The Treasury is trying to prevent Medtronic and other firms from using such mergers to relocate their legal addresses in a foreign country to avoid U.S. taxes on foreign profits when they're brought back to the U.S.

Wang expects Treasury doesn't have any more bullets to shoot at tax inversion deals.

"It sounds like Treasury has already reached the limits of what it can do, based on current law," she said. "And some of that is even questionable. It's not entirely clear they can actually do some of these things," she said.

Federal tax policy is driving U.S. multinationals to consider tax inversions, she added.

"Congress left that loophole in there to begin with," she said. "They were the ones who provided all these companies with a reprieve and said, 'OK. You don't have to pay that true-up on U.S. taxes until you actually bring the money back.' So, as a result, they all just leave it out there."

Medtronic said the transaction will strengthen the company and clear the way for investing billions of dollars in overseas profits back in the U.S.

Shares of Medtronic jumped in trading this morning following the news.

Not everyone was pleased by the news, however.

The bond rating firm Moody's Investors Service said it was reviewing Medtronic for a possible downgrade of its quality rating given the changes made to the Covidien deal financing.

"In light of the newly proposed Treasury rules, Medtronic's acquisition of Covidien is no longer as attractive because the company will significantly increase leverage and likely lose certain tax benefits," Diana Lee, a Moody's senior credit officer said in a statement.