On May 22, 2012, medical technology major Covidien plc (COV) announced the pricing of a two-part offering of senior notes by its subsidiary, Covidien International Finance S.A. (CIFSA). It priced 1.350% senior notes for the aggregate principal amount of $600 million due 2015 and 3.200% senior notes for the aggregate principal amount of $650 million due 2022. The company expects the offering to close on May 30, 2012.
The total proceeds of $1.25 billion from this offering will be utilized to finance the redemption of CIFSA’s outstanding 5.450% senior notes due in October 2012. These senior notes accounted for $500 million of the company’s long term debt at the end of fiscal 2011.
The company will use more than half of the total proceeds for general corporate purposes. This implies that existing debt refinancing is not the primary intention of the company and it wants to ensure sufficient liquidity through this offering. However, this reflects CIFSA’s high dependence on debt financing, which could be a result of lack of earnings to support operations and maintain adequate capital.
The company last sold debt during the fourth quarter of fiscal 2010 to finance the acquisition of ev3 Inc., which develops and markets vascular devices. Also worth mentioning in this context is Covidien’s recently announced acquisition of Newport Medical Instruments, Oridion Systems Limited and superDimension. As earlier, Covidien may also use the proceeds to finance a part of its recent acquisitions.
The book-running managers for the senior note offering are BNP Paribas Securities Corp., Citigroup Global Markets Inc, a division of Citigroup Inc. (C) and Deutsche Bank Securities Inc. under Deutsche Bank (DB). CIFSA claimed that the senior notes will be unsecured obligations ranked at par with all its existing and future senior debts.
The company still has a number of outstanding debt including senior notes due in June 2013, June 2015 and October 2017. We think the company will continue to restructure its debt to stay afloat.
Covidien business segments overlap with those of its competitors namely Becton, Dickinson and Company (BDX), Johnson and Johnson (JNJ) and CR Bard Inc. (BCR) among others. The stock currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We also maintain our long-term Neutral recommendation on the stock.
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