Medtronic’s announcement Sunday night that it intends to acquire Covidien points to continuing consolidation in the medical supply chain with carryon benefit to large contract manufacturers.

The Deal

Medtronic (NYSE: MDT) will pay $35.19 in cash and .95 of a Medtronic share per share of Covidien. The transaction values Covidien (NYSE: COV) shares at 29% premium to the Friday closing price. The total value of the deal is $42.9 billion. The combined annual revenues of the two firms is just over $27 billion, making the new entity the second largest medical device manufacturer just behind J&J with $29 billion in sales.

Issues for the Supply Chain

In the short term there should be no changes of significance for suppliers of either company. Medtronic and Covidien are too large and have too much risk on the table to begin merging their supplier bases for some time. This transaction, however, should serve as a warning to the supply chain. The Medtronic/Covidien deal is the second large combination among the 30 largest OEMs in the last two years and the third in four years. We see fewer large OEMs over time with correspondingly fewer large contract manufacturers supporting their outsourcing needs. Contract manufacturers under $50 million must concentrate on a strategy that will allow them to prosper in a world of fewer giants.

On the other hand, contract manufacturers with sales of over $100 million and a broad portfolio of capabilities will continue to benefit from consolidation.

For More Information

Please contact Richard W. Sager at Manning Advisors at rsager@manningadvisors.com or directly at (585) 315-8413.

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