Medtronic Inc. (NYSE:MDT) announced that it authorized the spin-off of its defibrillator unit to create a new publicly traded company, to operate under the name of Physio-Control, Inc. While the company's press release contains the only details we know to date, the company will eventually have to file a 10-12B with the SEC that will shed much more light on this new entity (watch for it). Let's take a look at what this deal entails...

According to their press release:

"Physio-Control will be the world’s leader in the $1 billion market for external defibrillation products, including automated external defibrillators (AEDs) and manual defibrillators used by hospitals and emergency response personnel. The new company will offer the current portfolio of external defibrillation and emergency response systems, data management solutions and support services, including the popular LIFEPAK® family of external defibrillators. The company will have approximately 1,200 employees and will operate in more than 100 countries around the world. The new company will continue to be headquartered in Redmond, Washington.

The spin-off is intended to take the form of a tax-free distribution to Medtronic shareholders of all the shares of Physio-Control, which will then trade as a new public company in the United States. The intended transfer of employees and assets to Physio-Control will be structured globally according to all applicable logistical, tax and legal requirements. Medtronic plans to structure the transaction to meet all of the requirements for a tax-free distribution and list Physio-Control’s shares on the New York Stock Exchange. The expected stock distribution ratio, including the record date for determining shareholders of record entitled to receive the distribution dividend, will be determined at a later date. Medtronic has retained Goldman Sachs to advise it on the transaction, which is expected to be completed in the first half of Medtronic’s fiscal year 2008."

Now this transaction is interesting for several reasons. First of all, spin-offs generally represent great investment opportunities for value investors. Tax-free spin-offs like this involve shares being distributed to parent company shareholders as opposed to a more traditional IPO process (roadshow, investment bankers, etc). It is this process that creates the value often seen in spin-offs. Many parent company shareholders may not have any interest in holding Physio-control shares and will sell them as soon as possible. Moreover, many mutual funds may not be authorized to hold these shares, and again may be forced to sell them. This downside pressure combined with the lack of an "IPO craze" creates a great buying opportunity for value investors. This is especially true for companies like this one, which are born as market leaders with a strong cash flow.

The second interesting part of this transaction has more to do with Medtronics. The company said they were spinning off this division in order to focus more on treatments of chronic medial conditions. Now, awhile ago there was speculation that Medtronics may be interested in acquiring Cyberonics, Inc. (NDAQ:CYBX) - a company that not only operates in this area but also has an angry activist shareholder on its back. While CYBX has appreciated in price significantly since the last mention of this rumor, the market still believes there is potential as the stock moved up over 3% in today's trading. These are definitely two stocks to watch as this situation unfolds.

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