Medtronic Bets On Itself
BY DAVID KRESSEL, APRIL 12, 2006
Medtronic, parent of orthopedic giant Sofamor Danek, has decided to rejigger its capital structure. It is offering $4 billion in convertible bonds, and using $2.5 billion of the proceeds to repurchase common stock, which comes out to about 4% of the company. Medtronic said that much of the offering and buyback will happen simultaneously and with the same institutions, so that in essence shareholders will be exchanging stock for convertible bonds. Most of the balance of the offering will go to retiring $1 billion of an outstanding convertible bond which comes due in September 2006.
Between the narrow credit spreads in the debt market and the strong interest in the convertible market in particular, Medtronic will be able to price the convert at around 2%, or less than your typical money market pays.
In addition, Medtronic will pay for a hedge which allows it to call stock to offset the share dilution from conversions. However, they will also sell warrants with an exercise price 50% higher than the current share price. This hedge plus the convertible bond makes a synthetic convertible with a much higher strike.
In the end, this creates cheap financing for Medtronic and numerous Medtronic securities and derivatives for hedge funds to trade. Still confused? See how Medtronic describes the transaction.
