Medtronic: Cutting Fat and Growing Margins

Slimming down is all the rage in health care these days. Pfizer (NYS: PFE) is cutting a few units. Bristol-Myers Squibb (NYS: BMY) spun-out its nutrition business Mead Johnson (NYS: MJN) . Abbott Labs (NYS: ABT) is breaking in two.

Medtronic (NYS: MDT) is the latest to the party, and although it's not making a major cut, the part it is cutting looks like all fat.

The company announced yesterday that it has sold Physio-Control to private-equity fund Bain Capital. The division, which is famous for its defibrillators but sells other emergency response products and services as well, contributed about $425 million to Medtronic's revenue annually over the past few years. All told, Medtronic is letting go of only about 2.5% of total sales.

At $487 million, Bain is paying just over 1.1 times sales for Physio-Control. Assuming Medtronic extracted the full value of the asset -- and it's not desperate for cash, so I imagine that's the case -- the ratio tells you Medtronic wasn't getting very good margins on Physio-Control's products. By contrast, investors are valuing Medtronic as a whole at 2.7 times sales over the past 12 months.

Medtronic says it'll use the cash to offset any dilutive impact of the lost revenue. The company doesn't break out earnings for individual units, but the loss isn't likely to make much of an impact on the bottom line. Medtronic would be best served using the cash to snatch up a new technology that could offer high growth and better margins in the future.

The sad part of selling off Physio-Control is that Medtronic originally purchased the unit back in 1998 for $538 million. Ironically, before it went public, Physio-Control was owned by Bain Capital, which originally bought the division from Eli Lilly (NYS: LLY) .

Unfortunately, sometimes diets cost money.

At the time thisarticle was published Fool contributorBrian Orelliholds no position in any company mentioned. Check out hisholdings and a short bio. The Motley Fool owns shares of Abbott Laboratories and Medtronic.Motley Fool newsletter serviceshave recommended buying shares of Pfizer and Abbott Laboratories. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.