Covidien PLC (COV): Interesting Medical Spin-Off for Mid-2013

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Dublin-based medical conglomerate Covidien PLC (NYSE:COV) has confirmed that it plans to complete the spin-off of its pharmaceutical division by the middle of 2013. Although the proposal to create Mallinckrodt Pharmaceuticals was announced more than a year ago, it has been subject to some non-fatal delays along the way. However, these appear to have been resolved. The soon-to-be-independent division has embarked on a major hiring spree and appears poised to begin trading on its own by the end of the second quarter of 2013. Current Covidien shareholders stand to reap the benefits of their patience in the form of an attractive share offering. At this point, it appears unlikely that anything will arise to scuttle or further delay the deal.

About Covidien PLC and Mallinckrodt Pharmaceuticals

Covidien is a highly-diversified drug and medical device manufacturer that makes a wide range of high-end medical products. Originally a wholly-owned division of Swiss conglomerate Tyco International Ltd. (NYSE:TYC) , Covidien PLC (NYSE:COV) has been independent for a number of years and has lately mounted an impressive program of organic growth. Tyco today focuses on safety and security solutions in various industries such as energy and shipping.  Covidien, on the other hand, produces a variety of surgical aids and devices, including laproscopic probes, vessel-sealing devices, staples, vascular dilation and contraction aids, and an assortment of dialysis-related products. It also manufactures ventilators, blood-flow aids, vital-signs monitors, and other types of durable hospital equipment. In addition to surgical aids and hospital-room machinery, the company also makes a variety of specialized disposable products for patients who suffer from incontinence, chronic wounds and other ongoing conditions. The company earned about $1.9 billion in revenue of $12 billion in 2012.  This number is now larger than Tyco, its parent company which has revenue just over $10 billion and a loss for the last twelve months.

Based in the Saint Louis area, Mallinckrodt Pharmaceuticals is Covidien’s pharmaceutical division and will soon become a standalone company. The firm is noted for producing various chemotherapy and radiotherapy drugs for cancer patients. It also produces opiate and NSAID painkillers, imaging and contrasting compounds, and diagnostic drugs that play an important role in detecting early signs of cancer and other serious health problems. The company operates a major research and development center in Missouri and employs several thousand others in various parts of the United States and Ireland.

How the deal is structured

Although the terms of this deal have yet to be finalized, its basic outline is clear. Covidien PLC (NYSE:COV) plans to spin off Mallinckrodt through a tax-free share distribution to all of its shareholders of record. The exact ratio by which the new company’s shares will be distributed has not yet been announced. It is expected that any fractional shares left over after the distribution will be distributed as cash payments to the appropriate shareholders. Thus far, there has been no talk of a special dividend, preferred stock distribution or other “sweeteners.”

Although it is not yet possible to pinpoint the exact premium that Covidien’s shareholders will receive as a result of the spin-off, the company’s investors have reacted favorably to news of the deal. Since its late 2011 announcement, Covidien’s shares have risen by more than 50%.

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