Before the long weekend holiday in Hong Kong and China last week, Minneapolis-based Medtronic agreed to pay $816 million for China’s KangHui Medical, which makes implants to treat orthopaedic conditions. It is a bid to win a piece of the pie in China’s healthcare market.
But also on Friday, US President Barack Obama cited national security risks when he called for China’s Ralls Corp to divest its interest in the wind farms it bought earlier this year in northern Oregon, close to a Navy base where the US military flies unmanned drones and electronic-warfare planes on training missions.
It was the first time in 22 years that a US president has blocked such a foreign business deal — the last time was when President George H W Bush voided the sale of Boeing supplier Mamco Manufacturing to the China National Aero-Technology Import and Export Corporation. With Americans hitting the polls next month to choose their next president, Obama is keen to appear tough on China.
It’s telling of the times that US companies see China as an open oyster for investment, but Chinese investment into the US is still regarded with suspicion.
To be fair, it’s hard to imagine China allowing the purchase of a company sitting next to its military training sites either. The Ralls Corp decision may signal that the US isn’t going to easily approve the proposed buyout of Calgary-based Nexen by the Chinese National Offshore Oil Corp (Cnooc). As Nexen has assets in the Gulf of Mexico, the US has a voice in the approval process. Several members of the US Congress have urged the Obama administration to block the transfer of Nexen’s offshore leases to Cnooc, both for national security reasons and on the grounds that some of the leases were issued under a mid-1990s incentive programme that offered royalty-free production in exchange for drilling in deep water.
Meanwhile, there is a political reason why the Medtronic deal is good to go — China needs to offer better medical care to its citizens, who are increasingly willing to demonstrate to get better education, healthcare and living conditions. Allowing greater foreign investment is one way to achieve that goal.
The agreement calls for Medtronic to pay approximately $816 million in cash ($30.75 per American depository share). The total value of the transaction, net of KangHui’s cash, is expected to be about $755 million.
“China is one of the fastest growing medical device markets with significant scale opportunities, and now Medtronic will establish a bigger and more direct local presence,” said Chris O’Connell, executive vice-president and president of Medtronic’s restorative therapies group. “KangHui brings Medtronic a broad product portfolio, a strong local R&D and manufacturing operation, a vast China distribution network and an exceptional management team. This move will provide Medtronic sustainable advantages in the fast-growing Chinese orthopaedic segment, as well as a foothold in the emerging global value segment in orthopaedics.”
“This agreement is directly aligned with our corporate strategies of globalisation and economic value,” added Omar Ishrak, chairman and CEO of Medtronic.
As a leading provider of orthopaedic devices in China, KangHui already has a strong product portfolio and a new product pipeline in trauma, spine and joint reconstruction. The combined portfolio expands Medtronic’s offerings in orthopaedic surgery and complements the company’s existing presence in spine, neurosurgery, neuromodulation, advanced energy and surgical navigation, say people close to the transaction.
“We are proud of the company we’ve built and recognise there is a tremendous opportunity to accelerate our global vision by building on Medtronic’s size, scale and expertise as part of this combined organisation,” said Libo Yang, CEO of Kanghui.
The transaction is expected to close during the next few months and is subject to customary closing conditions, including approval from the shareholders of KangHui.
Medtronic expects the deal to be earnings neutral for fiscal years 2013 and 2014 as the company intends to offset any dilution it causes.