Yesterday’s Inversion Buyers Are Next Targets: Real M&A

With a record number of U.S. tax-inversion deals shrinking the pool of possible targets, the next crop of acquirers may pursue their former American peers that have already reincorporated abroad.

While the Treasury Department is taking heed of President Barack Obama’s call to stop “corporate deserters” and weighing ways to deter companies from making overseas acquisitions for tax advantages, tax expert Robert Willens says it may only lead buyers to accelerate their plans. U.S. firms that have moved their legal addresses abroad present another option, according to Jefferies Group LLC, after about 20 deals since 2010 reduced the number of large, native European and Canadian candidates.

“You’re going to hear a lot of saber rattling on this issue, but it’s going to be hard to do anything at least before November, even from an executive level,” Kevin Kedra, a Rye, New York-based analyst at Gabelli & Co., said in a phone interview. “These deals still make sense,” he said. “There are a lot of quality companies out there that have done an inversion that could now be targets themselves.”

Perrigo Co. and Actavis Plc alone have added a combined $44 billion in market capitalization since announcing they were reincorporating abroad. The gains would make it easier for a larger rival to acquire them and meet the threshold for inversions that typically requires the foreign company’s investors to end up with at least 20 percent of the combined firm. Once Salix Pharmaceuticals Ltd. closes its deal with Cosmo Pharmaceuticals SpA and moves its mailbox to Ireland, it too could top the target list, said Canaccord Genuity Group Inc.

Political Action

The Treasury said this week that it’s examining whether it has the authority to act on its own to curb inversions and bypass Congress, which is unlikely to act in the near term, according to analysts including Charles Rhyee of Cowen Group Inc. Obama and the Treasury probably lack the power to do anything as substantive as what Congress could to prevent these deals, said William Dantzler, a tax partner at White & Case LLP.

The rule that allows an inversion “is in the statute plain as day,” Dantzler wrote in an e-mail. “Only Congress could change that.”

While news of the Treasury’s potential moves pressured stocks of inversion-related companies, the best the Obama administration could do is temper some of the financial benefits of such a deal -- which isn’t a straightforward process and probably won’t be retroactive, said Willens, founder of tax and accounting firm Robert Willens LLC.

Even so, “don’t take your time on these if you don’t want to be caught holding the bag,” Willens said in a phone interview.

Harder Hunt

Finding something to buy may not be as easy as it once was. Since Valeant Pharmaceuticals International Inc. kicked off the recent inversion frenzy with its 2010 purchase of Biovail Corp., targets from Elan Corp. to Shire Plc have been gobbled up.

There is an increasing scarcity “of companies to invert, at least sizeable companies,” David Steinberg, a San Francisco-based analyst at Jefferies, said in a phone interview. “There are still some European-based companies that are current standalones, which have not been inverted that could be. But a lot of the targets now are effectively U.S. companies who are domiciled in Ireland, like Perrigo.”

Reincarnated Targets

Perrigo, which moved its legal address to Ireland last year with its purchase of Elan, is attractive because of its dominant store-brand business model and strong cash flow, Steinberg said. Abbott Laboratories, Bristol-Myers Squibb Co. and Eli Lilly & Co. are among logical suitors, as they don’t compete with Perrigo’s over-the-counter store labels, he said.

“As it relates to inversion, if that ever did come about, it would be a secondary benefit, not the primary driver of us taking any type of M&A action,” said Edward Sagebiel, a representative for Indianapolis-based Eli Lilly. Spokesmen for Perrigo and Actavis declined to comment, as did representatives for Abbott Park, Illinois-based Abbott and New York-based Bristol-Myers.

Actavis, the world’s biggest generic drugmaker, could also lure inversion interest from large pharmaceutical companies, said Kedra of Gabelli. Actavis gained an Irish domicile when it acquired Warner Chilcott Plc in 2013. The $54 billion company bought Forest Laboratories Inc. this year to expand in brand-name drugs, bolstering its appeal for some buyers, Kedra said.

Analysts said this week that Pfizer Inc. may be interested in Actavis as an alternative to U.K.-based AstraZeneca Plc, which rejected an offer from the $179 billion company in May. Actavis has gained $37 billion in market value since announcing the Warner Chilcott deal, making it large enough for Pfizer to potentially make the inversion math work.

Perrigo shares climbed 1.2 percent to $143.28 today. Actavis rallied 0.9 percent to $205.79.

Bigger Options

Most companies that have ditched their U.S. addresses in the past four years have gotten bigger. The collective market value of those firms has increased by $129 billion since the inversions were announced, data compiled by Bloomberg show.

“They can be a target for a very large company since they’ve gotten pretty large themselves,” said Willens, the tax expert. “It definitely feeds on itself.”

It’s not just expat pharmaceutical companies that could become targets. Emerson Electric Co., valued at $43 billion yesterday, could invert with a takeover of Tyco International Ltd. or Pentair Plc, both former U.S. companies now based in Europe, said Steven Winoker of Sanford C. Bernstein & Co.

With a tax rate higher than 30 percent and most of its cash held abroad, “Emerson has the most to gain among our U.S.- domiciled companies,” Winoker wrote in a June 20 report. “Frankly, any of our companies that are left trapped in the U.S. after this window closes might be looking at significant money left on the table.”

Down the List

The at least nine inversion deals still pending could turn more companies into takeover bait. In the absence of legislation, the completion of Salix’s Irish reincorporation will give the $8.5 billion company an added allure for buyers that may have already been eyeing its portfolio of gastrointestinal drugs, according to Corey Davis, a New York-based analyst at Canaccord.

Auxilium Pharmaceuticals Inc., a $902 million maker of treatments for curved penises, could also become a target after it closes its inversion deal with Canadian biotechnology firm QLT Inc., said Michael Yee a San Francisco-based analyst at RBC Capital Markets, a unit of Royal Bank of Canada.

The Spinversion

U.S. companies also would have more options if they explored a spinversion, a type of inversion in which a conglomerate would spin off a portion of its business and reincorporate that piece by combining it with an overseas entity. Kimberly-Clark Corp., the $40 billion maker of Kleenex tissues that’s already spinning off a health-care unit, would be a candidate for such a transaction, Ed Outslay, an accounting professor at Michigan State University, said by phone.

A representative for Dallas-based Kimberly-Clark declined to comment, as did spokesmen for Tyco and Emerson. A representative for Raleigh, North Carolina-based Salix didn’t respond to request for comment. Neither did Auxilium and Pentair.

The Downside

Smaller deals may be easier to carry out amid growing backlash, said Kedra of Gabelli, a unit of Gamco Investors Inc. Companies such as Actavis are still appealing inversion targets for large buyers, though possible suitors including Pfizer will now have to wrangle with an even bigger political spotlight, he said.

The potential backlash was too much for Walgreen Co., which said this week it won’t use its deal with Bern, Switzerland-based Alliance Boots GmbH to move overseas. The drugstore company is still planning to buy the 55 percent of Boots that it doesn’t already own.

“The window is starting to close, and with Obama’s movement, I think that’s accelerating the closure of that window,” Damien Conover, a Chicago-based analyst at Morningstar Inc., said in a phone interview.

Because Walgreen is a well-known consumer name, it was probably more sensitive to political criticism. The drugstore’s decision to not pursue an inversion may actually be a positive for companies that are already in the middle of their own deals or considering one, said Yee of RBC.

“It didn’t shake the boat even more with a major American company doing it,” he said by phone.

U.S. companies with an inversion deal in mind that makes sense still should act fast, said Dantzler of White & Case.

They would be “well-advised to accomplish it as quickly as possible,” he said.

Before it's here, it's on the Bloomberg Terminal.