Perrigo uses strong shares to engineer a handy tax deal

Analysis

Perrigo and Elan might be strange bedfellows, but the former buying the latter for its Irish domicile and friendly tax rate looks like a smart use of Perrigo shares, whose price has more than quadrupled over four years.

Perrigo’s claims to becoming a “premier global healthcare company” notwithstanding, the deal is mainly about financial engineering, meaning that Royalty Pharma still has a chance to get its hands on the prized Tysabri royalty. It is now vital for Perrigo to maintain its share price at current levels between now and the shareholder vote on the Elan transaction in the second half.

It is interesting that Elan management has accepted a bid from Perrigo that is worth just $1 per share more than the full Royalty Pharma approach that it had rejected last month (Elan and Royalty head for big June 17 showdown, June 10, 2013).

Clearly Perrigo was able to beat Royalty Pharma thanks to being a listed entity and boasting a share price that over four years has appreciated from $28 to over $134. Only $6.25 per share of its offer for Elan is in cash.

The rejected Royalty Pharma bid The recommended Perrigo bid
Cash $13.00 $6.25
Contingent value right $2.50 none
Perrigo shares none 0.07636
Value of Perrigo shares at July 26 none $10.25
Total value per Elan share $15.50 $16.50

Thus to be able to boast having secured a takeover approach worth $8.6bn Elan will have to rely on Perrigo’s stock trading at current levels until the deal closes and investors who want immediate cash are able to sell their new stock in the market. After all, a lot can still happen before investors vote on an equity-based takeover.

Were Perrigo’s stock to decline 10% from Friday’s $134.23, for instance, the value of the transaction to current Elan holders would fall to below $15.50 per share – a level Elan investors would be expected to reject.

Strategic or financial?

Perrigo, a US company established over 100 years ago that specialises in over-the-counter and generic medicines, has highlighted the strategic rationale of the takeover; the deal’s most obvious element is a royalty stream to the blockbuster multiple sclerosis drug Tysabri, worth around $6bn, according to consensus estimates.

But in reality the takeover has an overwhelming financial element. By domiciling in Ireland courtesy of Elan, Perrigo reckons it can save some $150m per year after tax – an asset that Berenberg analysts say is worth around $1.5bn.

Given the importance to Perrigo of the tax break – and the fact that drug development is not its core focus – there must surely be scope for the company to seek to monetise the Tysabri asset. This would allow Perrigo to deleverage quickly and give it additional funds, while keeping only what it really wants.

After all, there is an obvious buyer for the Tysabri royalty – Royalty Pharma – and from its wrangling with Elan we already know how much this company might be willing to pay.

On a call with analysts today Perrigo’s chief executive, Joseph Papa, insisted that Tysabri was a “great asset” that was key to Perrigo's international expansion. But then anyone wanting to extract maximum value from an asset would say that.

Remarkably, given the earlier acrimony between Elan and Royalty, it is still possible for all three parties to come out of this deal happy.

To contact the writer of this story email Jacob Plieth in London at jacobp@epvantage.com or follow @JacobEPVantage on Twitter

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