July 19 (Bloomberg) -- AbbVie Inc. and Shire Plc’s $54.8 billion (32 billion pound) deal will make AbbVie the largest U.S. company to move its legal address abroad to lower its taxes as U.S. lawmakers seek ways to curb the transactions.
Shire holders will get cash and stock valued at 52.48 pounds a share, the companies said yesterday in a statement. The price is 53 percent above Shire’s closing level on May 2, before AbbVie made its first takeover proposal.
The acquisition comes in a record period of pharmaceutical deals. It will allow North Chicago, Illinois-based AbbVie to move its legal residence, though not its operations, to the U.K., lowering its tax rate in 2016 to 13 percent from 22 percent. Shire’s drugs for attention deficit hyperactivity disorder and rare diseases will diversify AbbVie’s portfolio, dominated by the rheumatoid arthritis medicine Humira.
Analysts asked if the deal was done primarily for tax reasons. “This is a transaction that we believe has excellent strategic fit, well beyond the tax impact,” AbbVie Chief Executive Officer Richard Gonzalez said on a conference call. “We wouldn’t be doing it if it was just for the tax impact.”
At the same time, Gonzalez said the higher corporate tax rate in the U.S. is pushing companies abroad. “Companies like ours need access to our global cash flows,” he said. “Today we’re at a disadvantage compared to our foreign competitors, and that’s the debate we should be having around inversions and our tax code.”
The U.S. government has been scrutinizing so-called tax inversions, and Senator Ron Wyden, a Democrat from Oregon, is proposing a bill that would make them more difficult to do. A congressional panel estimated this year that preventing future inversions would preserve $19.5 billion in otherwise forgone tax revenue over the next 10 years.
Gonzalez, during his call, said government action to stop tax inversions probably won’t halt the Shire deal.
“We’ve looked carefully at that aspect and we believe its executable,” he said.
Every deal that gets done, though, puts pressure on the U.S. government to act, said Brian Corvino, an analyst with Decision Resources Group.
“It’s kind of hard to ignore,” Corvino said in a telephone interview. “I don’t know if things can move fast enough to derail this, but it’ll be very hard for each new action in the future.”
In the negotiations, Shire sought protection in case the U.S. passes a law undercutting the tax gains and puts the deal’s closing at risk, said two people with knowledge of the matter. The agreement announced yesterday calls for AbbVie to pay Shire a breakup fee of 3 percent of the deal’s value, or about $1.6 billion, or reimburse costs of not less than $500 million, if the purchase falls through, according to the statement.
The deal caps AbbVie’s 2 1/2-month pursuit of Shire, which rejected four earlier proposals. It follows Pfizer Inc.’s failed $117 billion bid this year for London-based AstraZeneca Plc kicked off a surge of acquisition activity among companies seeking lower taxes.
Not including the AbbVie offer, there were deals proposed or completed worth $264 billion in the second quarter, according to data compiled by Bloomberg, five times more than any quarter since at least 2009.
Shire rose 4 percent to close at 49.96 pounds in London yesterday. The stock had surged 69 percent this year amid speculation the company would be acquired. AbbVie gained 2.6 percent to close at $54.91 in New York.
“It’s very, very sweet for Shire,” said Guillaume van Renterghem, an analyst at UBS AG in London. “The beauty of this AbbVie-Shire deal is that everybody gets out of this deal in even better shape than they entered it.”
AbbVie was split off from Abbott Laboratories in January of last year, creating a brand-drug company out of the larger health-care conglomerate that’s now focused on medical devices and nutrition products. Abbott was involved in a tax inversion this month as well, selling part of its off-patent drugs business to Mylan Inc., allowing the generic drugmaker to shift its legal address abroad.
Shire’s board said July 14 it would be willing to back AbbVie’s latest offer, and that negotiations were about issues other than price. Shire holders will receive 24.44 pounds in cash and 0.896 of an AbbVie share for each Shire share.
The combined company will have 15 drugs in the last of three stages of testing typically required before U.S. approval, Gonzalez said.
Gonzalez and his executive team won’t move out of the U.S. While Shire is based in Dublin for tax purposes, its main executive offices are in Basingstoke, England, and Chief Executive Officer Flemming Ornskov works in Lexington, Massachusetts. AbbVie has said the combined company’s tax domicile will be in the U.K.
Ornskov will lead the combined company’s rare-disease unit from Switzerland, reporting to Gonzalez. “Flemming is committed to staying post-close, as he would go through the integration process. I’ve had a number of discussions with him, he’s excited about role he’ll play with the new company.”
Ornskov will also receive $9.9 million as part of a retention arrangement for senior Shire employees, amounting to about 150 percent of his annual total compensation. Two Shire directors, Chairwoman Susan Kilsby and Dominic Blakemore, will join the AbbVie board.
The tax move by AbbVie is only the latest. Since January 2012, 20 U.S.-registered companies have shifted their legal address abroad to lower their tax rate or struck deals to do so, according to data compiled by Bloomberg.
Mylan said July 14 it will buy Abbott Laboratories’ generic-drug business and incorporate the new company in the Netherlands. Medtronic Inc., a Minneapolis-based medical-device maker, on June 15 announced a $42.9 billion takeover of Dublin-based Covidien Plc.
AbbVie cannot back out of the deal if U.S. tax laws change, according to company filings. Medtronic, on the other hand, can cancel its pact if Congress passes a law with the effect of keeping Medtronic’s tax domicile in the U.S.
AbbVie will gain a series of rare disease drugs, including Elaprase for Hunter syndrome, a genetic disorder, and Replagal, to treat Fabry disease. It also inherits experimental products, including lifitegrast for dry eye, and Premiplex for a potentially blinding eye disorder in infants. Premiplex could generate more than $1 billion annually if it reaches the market, said Jason Gerberry, an analyst at Leerink Partners.
Drugs for attention deficit disorder, including Vyvanse and Adderall XR, accounted for about 39 percent of Shire’s revenue last year.
JPMorgan Chase & Co. is advising AbbVie on the deal, while Citigroup Inc., Deutsche Bank AG, Evercore Partners Inc., Goldman Sachs Group Inc. and Morgan Stanley are advising Shire.
(An earlier version of this story was corrected because analyst Brian Corvino’s name was misspelled.)