The battle for Winterfell

In the final episode of Game of Thrones the Stark family was a big winner not only did Bran Stark ascend to the Iron Throne Winterfell retained it’s independence long the wish of Sansa and Arya Stark. Although Jon Snow after whacking the love of his life Daenerys Targaryen was exiled many believe Jon will find love again and re-emerge. We’re reminded of this series of events as we have learned that Omar Ishrak Medtronic’s embattled CEO is prowling the Westerlands a kingdom he rarely visits.

Now we don’t buy for a minute that Omar is here to enjoy what is turning out to be outstanding weather in the Bay Area nor to promote the latest line of way cool whiz bang toys about to be produced for his struggling diabetes franchise. And since we’re pretty sure he got an invite to the Medtronic investor event tomorrow we don’t think he made the trek from Winterfell to attend this dog and pony show.

The only reason the king has descended from his castle is he sees the White Walkers gathering around his embattled kingdom. Having surrendered already to Tidepool there is only more thing he can do, rather than face the White Walkers in what would be a fierce and ugly battle, form an alliance with private equity to take this valuable yet struggling franchise off his hands.

By our quick back of the napkin calculations the franchise should fetch around $6 Billion or so which is hefty price for our private equity friends who will likely leverage this deal to the hilt. The king can make the deal more palatable by retaining say a 40% interest, spinning out the franchise, let private equity fix it and then collect again when private equity recapitalizes the company either through an IPO or reselling to someone else.

Just as Platinum Equities was able to cover their debt service after acquiring LifeScan from JNJ, we don’t see much of a problem for another private equity group doing the same thing with this franchise. For all it’s problems the franchise now stripped of all the non-essential costs throws off a ton of cash. While Tandem and Insulet are growing Medtronic still has the largest installed user base, the goose that lays all those very profitable golden eggs. Should the new owners accept reality and dump their worthless CGM allowing future versions of the pump to communicate with the Dexcom G6/G7 or Libre, they can prevent more precious capital from being flushed down the toilet.

All the new owners have to do is what Medtronic was trying to do but didn’t do very well, prevent serious erosion to their huge installed user base. Sure new sales would great but just by keeping the installed base happy they will make plenty of money. Nor will the new owners end up with any egg on their faces as they aren’t the ones going around saying that a worthless CGM will one day be a multi-billion dollar product line.

The new owners unencumbered by the past can pivot entirely not just allowing future pumps the ability to communicate with any CGM but also buy one of the many Dexcom wannabes and make it their option in this growing yet crowded space. Unlike current ownership that remains completely clueless about CGM, the new owners just might realize that when it comes to CGM Dexcom and Abbott are like Pac Man gobbling up new patients by the boatload. They might reason since Dexcom and Abbott own the space are getting nothing but larger it’s ok to have an option to compete with all the other Dexcom wannabes who are battling over the scraps left behind by Dexcom and Abbott.

Frankly this should be an easy decision for the king who should have learned a valuable lesson when a company fails to sell when a franchise still has value. Although Medtronic screwed up the Animas conversions in a major way JNJ screwed up even more by not selling Animas when the unit still had value. Should the king fail to see this handwriting on the wall he could well make the same fatal mistake JNJ did. Sure the franchise could be fixed but the cost will be high as will be the headaches and given their track record we aren’t exactly confident they would execute any fix very well.

So why not sell collect a few billon today and few billion more later it sure beats getting your butt kicked on a daily basis.