AbbVie’s Threat on Shire Deal Is Latest Tax Rule Fallout

AbbVie Inc. may scrap its planned 32.4-billion-pound ($51.5 billion) deal for Dublin-based drugmaker Shire Plc, in what would be the biggest casualty of the U.S. crackdown on so-called tax inversions.

Shire stock plunged the most in 12 years after North Chicago, Illinois-based AbbVie said its board will meet by Oct. 20 to reconsider its recommendation that shareholders approve the deal. Shares of companies that are speculated to be or are involved in pursuing tax inversion deals, including AstraZeneca Plc, Actavis Plc and Covidien Plc, fell as investors reassessed the likelihood of the transactions.

People familiar with the matter said AbbVie is on the verge of abandoning its bid, after recent talks with the U.S. Treasury Department and Internal Revenue Service left it convinced that tax rule changes would undermine the deal’s rationale.

Shire said it would waive the three-day requirement for AbbVie’s board to hold its meeting in order to shorten the “the period of uncertainty for its shareholders, employees and other stakeholders.”

AbbVie’s move caught investors off guard after the drug company had said the deal was driven mostly by strategic, not tax, reasons. AbbVie said it reconsidered the transaction after the Treasury announced rule changes designed to limit moves overseas by American companies.

‘Backing Out’

“They had given a little bit of body language, comments, etcetera, that they were committed to this post the Treasury deal and now for them to say this -- basically it looks like they’re backing out,” said John Schroer, sector head of U.S. health care at Allianz Global Investors, an AbbVie shareholder. “It’s hard to piece together what exactly is happening, whether they’re walking away altogether or whether they’re looking for a better price.”

The deal as now structured would move AbbVie’s legal address to the U.K., avoiding the 35 percent U.S. corporate tax rate and giving it access to cash trapped overseas.

“There is a reasonable probability that AbbVie’s board will either attempt to renegotiate its agreement with Shire, or withdraw its recommendation to AbbVie stockholders because the financial benefits of the transaction are now probably significantly lower,” Alex Arfaei, an analyst with BMO Capital Markets, said in a note to clients yesterday.

Shire Falls

Shire plunged 22 percent to close at 40.12 pounds in London, the biggest single-day loss since February 2002. AbbVie rose less than 1 percent to $54.63 in New York. The cash-and-stock offer values Shire at about 54.92 pounds a share, based on yesterday’s closing share price for AbbVie. The deal was worth about $55 billion when announced.

“AbbVie’s management’s credibility may now be called into question given the non-inversion benefits they touted when initially selling the deal and the fact that their limited public comments since the Treasury Notice was released have stressed the merits of getting the deal done,” Vamil Divan, an analyst at Credit Suisse, said in a note to clients yesterday.

If it goes ahead, AbbVie would gain Shire’s treatments for attention deficit hyperactivity disorder to diversify its drug portfolio. The deal was announced July 18 and was part of a wave of similar moves this year. Completion of the deal would make it the biggest tax inversion ever.

Shire’s board said AbbVie should proceed with the recommended offer on the agreed terms, and said it would be owed a $1.6 billion breakup fee if AbbVie halts the deal.

Others Affected

Shares of other companies considered targets of inversion, or that are involved in inversion deals that haven’t yet closed, fell as well.

AstraZeneca, a London-based drugmaker that spurned a takeover offer from Pfizer Inc. this year, dropped 3.2 percent to close at 42.65 pounds.

Pfizer has considered a renewed approach, or bidding for Actavis, another deal that would allow the company to move overseas and reduce its taxes, people with knowledge of the matter said last month. Actavis fell 2.2 percent to $217.24. Covidien, a U.K. medical-device maker being bought by Minneapolis-based Medtronic Inc., fell 7 percent to $85.86.

‘Bad Sign’

“This kind of news today is a bad sign for an AstraZeneca/Pfizer deal,” said Odile Rundquist, an analyst at Helvea SA in Geneva. “If Pfizer doesn’t get the full benefit of lower taxes, they should reduce their price, and that’s something Astra will never accept. These new inversion rules are definitely a negative.”

At the board meeting AbbVie will consider, among other things, the impact of the tax changes on “the fundamental financial benefits of the transaction,” the company said in its statement.

Ronny Gal, a New York-based analyst at Sanford C. Bernstein & Co., warned it may be hard to renegotiate the deal under U.K. takeover laws and put a 75 percent probability on the deal proceeding.

“The strategic rationale of the deal did not change, AbbVie does not have a lot of other attractive options and changing course has a cost as well,” he said in a research note to clients.

While Shire is based in Dublin for tax purposes, its main executive offices are in Basingstoke, England, and AbbVie has said the combined company’s tax domicile would be in the U.K.

Jennifer Smoter, an AbbVie spokeswoman, declined to comment beyond the company’s statement. Stephanie Fagan, a spokeswoman for Shire, also declined to comment.

A U.K. home is attractive to companies for several reasons. The corporate tax rate there is 21 percent and scheduled to decline to 20 percent next year, compared with 35 percent in the U.S. Also, unlike the U.S., the U.K. doesn’t tax the profits companies earn outside the country.

Treasury Rules

The Treasury Department last month detailed rules designed to make so-called inversions less attractive. The rules, which will be effective for deals that close on or after Sept. 22, address some of the techniques U.S. companies have been using to move their tax addresses outside the country.

Notably, they prevent hopscotch loans, which let companies access foreign earnings that would be subject to U.S. tax if repatriated by loaning them from a foreign subsidiary to the new foreign parent company.

AbbVie has large amounts of foreign earnings held in cash. As part of the Treasury department’s new rules, the access for inverted companies to this cash would be restricted without paying U.S. taxes.

The company relies on its best-selling Humira, a rheumatoid arthritis injection, for more than half of its revenue. It is also developing a hepatitis C pill to compete with Gilead Sciences Inc.’s newly approved Harvoni.

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