Actavis Inc. (ACT)’s $5 billion deal to buy Warner Chilcott Plc (WCRX) brings in a new stable of brand-name women’s health drugs. It also comes with headquarters relocated to Ireland and lower taxes for the combined company.
The deal is the second by Actavis to combine product expansion with a major tax advantage that will lower the company’s tax rate to 17 percent from about 37 percent over the course of a year. U.S. lawmakers are debating an overhaul of tax code that may lower the corporate tax, now 35 percent and the highest in the developed world. As business leaders such as Apple Inc. (AAPL)’s Tim Cook travel to Washington to testify today on behalf of lower rates, Actavis Chief Executive Officer Paul Bisaro says his company isn’t waiting for reform.
“What we’re trying to do is level the playing field,” Bisaro said in a telephone interview.
While the main reason for the deal was Dublin-based Warner Chilcott’s portfolio of drugs, the tax benefits of basing the company outside the U.S. were “icing on the cake,” he said. The company will pay lower U.S. taxes, and lower total taxes.
The acquisition won’t change much about how Actavis operates other than how it pays taxes. Most of the employees and leaders will remain in the U.S., and its company’s Parsippany, New Jersey headquarters will remain the center of operations.
“Everybody loves New Jersey too much, so nobody is willing to go,” Bisaro said yesterday on a conference call. Executives “will be spending a lot of time,” in Ireland, “but we don’t think anyone will be moving.”
Previously called Watson Pharmaceuticals, Actavis took the name of the closely held Zug, Switzerland-based generics maker it acquired last year for 4.25 billion euros ($5.5 billion). The company has grown from a largely U.S.-focused generic drugs company to a multinational with a brand-name arm. Bisaro has made a lower tax rate a top priority for the company, which is the largest U.S. maker of generic drugs by market value.
The Watson-Actavis deal cut the company’s tax rate to about 28 percent from 37 percent. The Warner Chilcott purchase will shave another 10 percentage points off the tax rate. The deal does so by shifting where Actavis makes its profits to outside the U.S., taking advantage of Ireland’s 12.5 percent corporate tax rate.
Bisaro has been outspoken on what he sees as a too high U.S. tax rate. “We’re at a competitive disadvantage in a global marketplace because of the U.S. tax structure,” he said in an interview with Bloomberg in February. That “means, unfortunately for the U.S. taxpayer and the job seeker, that we’re forced to move more jobs overseas so we can get a lower tax rate and be competitive with the ex-U.S. companies.”
The U.S. tax code can drive companies into these sorts of transactions -- called tax inversions -- because it allows them to take advantage of lower foreign rates while keeping most of their actual operations unchanged, said Bret Wells, a professor at the University of Houston Law Center who studies corporate tax issues.
Lawmakers have criticized companies that move profits overseas to lower their taxes. A U.S. Senate report yesterday found that Apple, the Cupertino, California-based maker of the iPhone, used offshore entities to avoid billions of dollars in taxes.
“A company that found remarkable success by harnessing American ingenuity and the opportunities afforded by the U.S. economy should not be shifting its profits overseas to avoid the payment of U.S. tax, purposefully depriving the American people of revenue,” said Senator John McCain, an Arizona Republican who co-authored the report by the Senate Permanent Subcommittee on Investigations.
Tax avoidance strategies like that used by Apple “add to the federal deficit and ought to be closed,” said Senator Carl Levin, the Michigan Democrat who chairs the subcommittee.
Apple, in a statement on its website, defended its practices and said it paid $6 billion in U.S. taxes last year. Cook, the CEO, is scheduled to speak today at a Senate hearing.
Actavis is the most recent tax inversion deal. Last year, Cleveland, Ohio-based Eaton Corp., a hydraulics manufacturer, bought Ireland-based Cooper Industries Plc for $11.8 billion, relocated to Ireland, and said it would save about $160 million in taxes.
The transactions are legal as long as the acquiring, U.S.- based company gives up at least a 20 percent interest to the foreign target, Wells said. That’s a substantial hurdle that has limited the number of such deals.
“You can have a minnow swallowing a whale, but the minnow has to be 20 percent of the combined company,” he said. “To do a transaction that size, it needs to be a strategic fit.”
It also means that, unlike a U.S.-based company that houses some profits overseas, the newly foreign company can use its profits for whatever it likes, such as share buybacks or dividends, Wells said, without having to bring cash back to the U.S. and pay a tax penalty on it.
“This inversion is nirvana. If I’m a U.S. multinational and I strip profits to my foreign subsidiary, when I repatriate those earnings back to the U.S. parent then I’m going to have to deal with the U.S. residual tax. As a foreign-based multinational, the ultimate parent company of Actavis will not have to worry about those issues.”
In the Actavis deal, Warner Chilcott investors will receive 0.16 shares of new Actavis stock for each Warner Chilcott share they own, the companies said yesterday in a statement. The agreement values each Warner Chilcott share at $20.08, a 4.5 percent premium over the stock’s closing price on May 17. Including Warner Chilcott’s more than $3 billion in net debt, the total value of the acquisition is about $8.5 billion.
The combined company will have $11 billion in annual revenue as Actavis adds gastroenterology and dermatology businesses, the companies said. Actavis this month rejected an offer from Mylan Inc. (MYL) for $15 billion, deciding instead to pursue talks to take over Warner Chilcott, said people familiar with the matter, Bloomberg News reported on May 14.
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