AbbVie-Shire Talks Seen Focusing on Tax, Price Risks

With a deadline tomorrow for AbbVie Inc. (ABBV) to make a firm bid for Shire Plc (SHP), talks between the drugmakers probably revolve around issues that include possible changes to U.S. tax laws, or a drop in AbbVie’s stock.

Any agreement will probably include language on what will happen if the combined company can’t be domiciled in the U.K., allowing AbbVie to cash in on that country’s tax advantages, said Ronny Gal of Sanford C. Bernstein & Co. Since AbbVie plans to pay partly with its own shares, Shire also may seek a so-called collar, a provision to guarantee a minimum price should AbbVie’s stock decline.

The question of price appears to be resolved, indicating a deal is likely, said Damien Conover, an analyst at Morningstar Inc. in Chicago. Shire said July 14 it would be willing to back a 31.4 billion pound ($53.7 billion) offer, and that the companies were in talks on other issues.

“We think it’s a strong likelihood the deal will go through,” said Conover. “They’re probably going through the specifics of everything from the timing of a potential deal to any concerns either company might have after detailed analysis of the books.”

Under U.K. takeover rules, AbbVie, based in North Chicago, Illinois, needs to make a formal offer by 5 p.m. London time tomorrow or walk away for six months in most circumstances. Shire can ask the U.K. Takeover Panel for an extension to work out a final agreement.

Extension Agreement

“It wouldn’t be such a big deal if they agreed to an extension considering the circumstances,” Sheela Sharma, an analyst at Kepler Cheuvreux in London, said in a phone interview.

Stephanie Fagan, a Shire spokeswoman, declined to comment on the talks. Adelle Infante, an AbbVie spokeswoman, also dclined to comment.

AbbVie’s latest proposal, its fifth, valued Shire at about 53.20 pounds a share when it was announced July 14. With the decline in AbbVie’s stock since then and shifts in the dollar-pound exchange rate, the value has fallen to about 52.27 pounds now.

Shire’s tax domicile is in Ireland and the company’s management offices are in Basingstoke, England. AbbVie has said it plans to domicile the combined company in the U.K. Moving its legal address overseas through a so-called tax inversion deal would allow the U.S. company to lower its tax rate to 13 percent from 22 percent.

Treasury Secretary

U.S. Treasury Secretary Jacob Lew asked Congress this week to approve tax changes retroactive to May that would stop such transactions after Minneapolis-based Medtronic Inc. and Canonsburg, Pennsylvania-based Mylan Inc. announced their intention to move their legal addresses outside the U.S.

At the same time, shares for Abbott Laboratories (ABT), which spun off AbbVie in 2012, climbed as much as 4.73 percent today, the biggest intraday gain since October 2013. The rise could be could be tied to “chatter” around the company executing its own inversion strategy, said Joshua Jennings, a New York-based analyst at Cowen & Co LLC, in a telephone interview.

“There will almost certainly be a condition in the contract that says that all this goes away if they can’t invert,” Gal said in a phone interview.

Buying Shire also allows AbbVie to add treatments for rare diseases and attention deficit disorder, easing the company’s reliance on the rheumatoid arthritis injection Humira.

AbbVie may follow a precedent set by medical device maker Medtronic, which made its acquisition of Covidien Plc contingent on no changes to U.S. tax law, said Michael Leuchten, analyst at Barclays Plc in London.

“The question is, can the parties agree to that or not?” he said by phone.

The companies also may be discussing a contingent value right that would give Shire shareholders added compensation if experimental products end up paying off, Gal said.

To contact the reporters on this story: Makiko Kitamura in London at mkitamura1@bloomberg.net; Simeon Bennett in Geneva at sbennett9@bloomberg.net; Caroline Chen in New York at cchen509@bloomberg.net

To contact the editors responsible for this story: Phil Serafino at pserafino@bloomberg.net; Reg Gale at rgale5@bloomberg.net Reg Gale

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