The AbbVie board meets next Monday to reconsider the recommendation it made to shareholders in July to back the deal, in light of new US Treasury rules designed to discourage American companies from redomiciling abroad to cut their tax bill.
The deal could become the biggest to be wrecked by the White House’s crackdown on tax inversions.
Here is what analysts made of the news. Some wonder whether the deal could be renegotiated, while others think it is dead in the water.
Savvas Neophytou at Panmure Gordon still expects the deal to go through. He notes the anti-inversionchanges will require Senate support and “this is far from being a certainty and will likely take considerable time”.
The board of Abbvie has 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.
The board meeting on 20 October will likely consider the use of so called hopscotch loans. The use of such loans to finance a transaction relies on a foreign subsidiary of an inverted company could lend money to the newly incorporated foreign parent.
Ana Nicholls, healthcare analyst at the Economist Intelligence Unit, said:
It is hardly surprising that AbbVie is rethinking its Shire merger in the light of the new US tax inversion rules. One of the big benefits of the proposed US$54.6bn deal was that, by shifting the combined company’s tax base to the UK, it would allow AbbVie to avoid paying high US tax rates on its profits. Barclays reckoned the resulting tax savings would amount to US$1.3bn a year by 2020. Earlier this month, Salix cited the new rules when it pulled out of a merger with Cosmo, another Irish company.
But there are other benefits to the Shire merger besides tax savings. AbbVie faces patent expiry on its main product, Humira, in 2016 and is keen for new product to help fill its pipeline. Shire not only offers a strong line-up of ADHD drugs but also a promising portfolio of drugs for rare diseases, which command a higher price from insurers and health funds. Its new drug pipeline is also fairly strong, with seven drugs in late-stage development or awaiting marketing approval.
This is only a rethink, in short, and AbbVie’s board may instead recommend a modification of the deal - which could mean trying to renegotiate the price or change other terms of the deal. It is notable that the Shire chief executive, who resisted AbbVie’s initial offers so strongly, is now proclaiming his enthusiasm for the deal.
However, Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers, was not convinced.
The likelihood of the AbbVie/Shire deal has all but disappeared judging by the market reaction, whilst the possibility of Pfizer approaching AstraZeneca anew must also be in serious jeopardy, both falling foul of the potential tightening of US tax inversion laws.
On a connected but separate issue, even the perennial target of bid speculation, medical company Smith & Nephew, has also seen its shares hit on the read across.
Mike van Dulken, head of research at Accendo Markets, said:
Shareholders in Shire must be doing a double-take this morning with shares back trading at mid-June levels after AbbVieannounced that it was reconsidering their $54bn merger in light of recent (22 Sept) rule changes by the US treasury designed to discourage what is known as ‘tax inversion’ (cross-border deal, pay bulk of tax in lower rate country).
Unsurprisingly Shire says AbbVie should proceed, and if it the deal collapses it still stands to pick up a handsome $1.6bn in deal break fees, however, that’s far from compensation for the £10bn market cap gains (40% share price rise) which many considered to be in the bag with the deal set to close in Q4.
The potential for a 20 Oct modification of the deal or indeed a full withdrawal is likely to have a significant knock-on for sentiment towards corporate activity given how this year’s strong flow of M&A helped markets towards recent highs. Beware the fallout.
Charles Stanley analyst Rae Ellingham said:
Given the uncertainty surrounding the offer we consider investors should view Shire on a stand-alone basis, with a transaction with AbbVie offering upside potential. Shire’s FY earnings are expected to grow in the low-to- mid thirty percent range, the shares are trading in line with large pharmas but at a discount to speciality pharmas, and we expect continued good performance from the group.
Ben Jones partner and tax expert at law firm Eversheds, said:
It is of course right and proper for the board of AbbVie to give further consideration to the proposed merger with Shire in light of the changed fiscal environment in which the merger would occur. Leaving aside the underlying issues with so-called “corporate inversions”, this reconsideration and the potential for the merger to collapse (with significant wasted costs incurred) highlights the serious issues with reactive changes to established rules implemented with immediate effect.
A key requirement for businesses across the world is certainty as to the environment in which they operate, be it from a tax, legal, regulatory or other perspective. Business cannot operate effectively when the playing field is changed overnight. To avoid prejudice to businesses operating in accordance with the pre-existing rules, changes such as those made to US tax rules relating to corporate inversions really need to be preannounced with sufficient time for business to react.
