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 Chicago-based AbbVie said late on Tuesday it was responding to the
U.S. proposals which aim to make it harder for American firms to
shift their tax bases out of the U.S. and into lower cost
jurisdictions in Europe.
AbbVie's move for Shire, a leader in drugs to treat attention
deficit hyperactivity disorder (ADHD) and rare diseases, was
announced in July amid a spate of similar takeover deals within the
U.S. and European pharmaceutical sector.
It proposed creating a new U.S.-listed holding company with a tax
domicile in Britain, which applies low tax rates to patent income
and has passed laws that make it easy for companies to shift profits
into tax havens.
The news hammered shares in Shire, sending them down 27 percent,
back to where they were before the deal talks emerged in June.
Shares in larger rival AstraZeneca, which had rebuffed its own
takeover deal by U.S. group Pfizer fell 4 percent while replacement
knees and hips maker Smith & Nephew, which had also been touted as a
target, slipped 3 percent.
AbbVie's move wrongfooted Shire investors, coming just weeks after
AbbVie chief executive Richard Gonzalez, in the wake of the Treasury
proposals, told employees of both companies he was "more energized
than ever" about the deal.
Also tax advisers had said the Treasury measures were unlikely to
significantly impact most inversion deals.
Although the new rules will make some deals costlier and others more
difficult, fast-food chain Burger King Worldwide Inc said it will
proceed with its $11.5 billion transaction with Canada's Tim Hortons
Inc.
Gonzalez had said Shire's appeal stretched far beyond its tax
domicile, pointing to its portfolio of drugs, some of which command
prices of hundreds of thousands of pounds for an annual course of
treatment, and its pipeline.
Buying Shire would reduce AbbVie's reliance on its Humira drug, the
world's top selling arthritis medicine which loses U.S. patent
protection in 2016.
Nonetheless, the tax savings from the deal were significant.
Locating the combined group in Britain could reduce AbbVie's 22
percent tax rate to about 13 percent for the new company, it had
said.
POLITICAL HEAT
The number of tax-inversion deals, particularly in healthcare, have
surged in the past year, ramping up the pressure on the Obama
administration to clamp down on corporate deals aimed at lowering
tax bills.
The U.S. Treasury has used existing laws to limit tax inversion,
including a prohibition on "hopscotch" loans, which allow U.S.
companies to access foreign cash without paying tax in the United
States.
Panmure Gordon analyst Savvas Neophytou said the board of AbbVie had
a responsibility to its shareholders to consider new facts relating
to any ongoing event that impacts shareholder value.
"Ultimately we expect the deal to go through," he said.
Analysts at Barclays said even after the changes there were still
tax benefits available to AbbVie, not least access to Shire's U.S
cash stream, which reduces the amount of cash that AbbVie needs to
be repatriated from abroad to fund dividend payments, share buybacks
and domestic business development.
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They estimated Shire's U.S. cash stream alone affords AbbVie roughly
$500 million of tax savings a year.
Cenkos analyst Navid Malik said AbbVie could be playing "hardball".
"They could have put this out to try and get Shire back to the table
to potentially renegotiate but I don't think that will happen," he
said.
"Shire’s the one with the least amount to lose. Shire has a strong
pipeline and a very strong product portfolio."
Were AbbVie to renege on its recommendation for the deal to
shareholders it could have to pay a break fee of around $1.6 billion
to Shire.
"AbbVie's board will consider, among other things, the impact of the
U.S. Department of Treasury's proposed unilateral changes to the tax
regulations announced on September 22," AbbVie said.
The U.S. firm said its board would meet on Oct. 20 to consider
whether to withdraw or modify its recommendation on the deal with
Shire.
Shire, which said its trading had remained strong, urged AbbVie to
push ahead with the deal.
"The board of Shire believes that AbbVie should proceed with the
recommended offer," Shire said.
HEDGE FUNDS BURNT
Some of the world's top hedge fund managers, who had been building
up "long" positions betting on future share price gains at Shire due
to AbbVie's bid interest, faced getting burnt by AbbVie's decision.
Data from Britain's Financial Conduct Authority (FCA) showed that no
fund had a major "short" position of more than 0.5 percent that
marked a bet on Shire's shares falling in future.
"We just don’t know what's happened," said one hedge fund manager,
who declined to be named.
"The tone from the AbbVie camp since the new U.S. rules has been
very instructive up until now. They have been very keen to do the
deal."
Shire was advised by Goldman Sachs, Morgan Stanley, Deutsche Bank,
Evercore and Citigroup, while AbbVie was advised by J.P. Morgan.
(Writing by Kate Holton; additional reporting by Anjuli Davies and
Sudip Kar Gupta; editing by Anna Willard and Giles Elgood)
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