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 Shire stands to be paid a break-up fee of about $1.64 billion,
assuming AbbVie's shareholders follow the advice and reject the
transaction.
The reversal -- which had been anticipated after Chicago-based
AbbVie said it was reconsidering the deal -- hands a major scalp to
the U.S. Treasury, which has been fighting to make tax-avoiding
acquisitions more difficult.
That has hit the value of other potential takeover targets in Europe
and cast a shadow over transactions that have yet to be completed.
But AbbVie's retreat could spark fresh deal-making by Shire, which
has a strong track record of acquisitions to fuel its fast-growing
business and may now look around to buy other companies, with its
firepower boosted by the break-up fee.
The U.S. government's tax proposals are designed to make it harder
for American firms to shift their tax bases out of the country and
into lower cost jurisdictions in Europe.
"The agreed-upon valuation is no longer supported as a result of the
changes to the tax rules and we did not believe it was in the best
interests of our stockholders to proceed," AbbVie's chief executive
Richard Gonzalez said in a statement.
AbbVie's move for Shire, a leader in drugs to treat attention
deficit disorder and rare diseases, was announced in July amid a
spate of deals in the pharmaceutical sector.
Gonzalez said at the time that the acquisition, involving the
creation of a new U.S.-listed holding company with a tax domicile in
Britain, was not just about tax.
But the firm said on Thursday that the changes in the U.S. tax
regime "eliminated certain of the financial benefits of the
transaction, most notably the ability to access current and future
global cash flows in a tax efficient manner as originally
contemplated in the transaction. This fundamentally changed the
implied value of Shire to AbbVie in a significant manner."
Shire said it was considering the current situation and would make a
further announcement in due course.
News on Wednesday that AbbVie was cooling to the transaction
hammered shares in Shire, sending them down 22 percent to where they
were before the deal talks emerged in June, and the shares were down
a further 12 percent at 3,525 pence by 1145 GMT.
AbbVie's charge of heart has been a bombshell for some of the
world's top hedge funds, which have lost out heavily on the Shire
stock they were holding.
SHAREHOLDER MEETING
AbbVie said the withdrawal of its recommendation alone would not
cause a lapse in the offer for Shire and it must convene a
shareholder meeting before Dec. 14 to vote on the deal.
A spate of so-called tax inversion merger deals, particularly in
healthcare, prompted the U.S. move to change tax regulations,
including placing a ban on loans that allow U.S. firms to access
foreign cash without paying U.S. tax.
AbbVie said the breadth and scope of the changes "introduced an
unacceptable level of uncertainty to the transaction".
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The company also took a swipe at the "unilateral" nature of the U.S.
government's move and complained about "the unexpected nature of the
exercise of administrative authority to impact longstanding tax
principles".
AbbVie's second thoughts on the deal have surprised Shire investors,
coming just weeks after Gonzalez, in the wake of the Treasury
proposals, told employees of both companies he was "more energized
than ever" about the transaction.
Aside from the tax benefits, buying Shire offered AbbVie a way to
reduce reliance on arthritis treatment Humira, the world's top
selling medicine, whose $13 billion in annual sales accounts for
more than 60 percent of company revenue.
The episode has fueled doubts about whether Pfizer will ever make
another run at AstraZeneca, after abandoning a $118 billion bid in
May. AstraZeneca shares fell 2.5 percent on Thursday, after losing
ground on Wednesday.
Shares in Britain's Smith & Nephew and Switzerland's Actelion, also
tipped as inversion targets, both fell a further 3 percent.
Tax experts say inversions are still possible but the U.S. action
has cut their appeal, suggesting they will only make sense if there
is a compelling strategic fit between two firms.
Two other U.S. drugmakers, Salix Pharmaceuticals and Auxilium
Pharmaceuticals, have already called off smaller inversion deals
this month.
SHIRE'S OWN DEAL-MAKING
Analysts are now looking ahead to Shire's strategy as an independent
company once again and its own potential for making acquisitions --
or else becoming a target for another company.
Before the AbbVie agreement, Shire Chief Executive Flemming Ornskov
had made clear he was interested in buying assets and Jefferies
analysts said a standalone Shire could now be poised to aggressively
target acquisitions.
Shire itself might also be a target for other pharmaceutical
companies less driven by tax considerations. Allergan, for
example, which is fighting a bid from Valeant Pharmaceuticals
International, has approached Shire in the past.
(Additional reporting by Abhiram Nandakumar and Aurindom Mukherjee
in Bangalore; Editing by Greg Mahlich, Pravin Char and Clara
Ferreira Marques)
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