Takeout rumours swirling around Shire have flushed out a named bidder. AbbVie today disclosed that the UK group has rejected an indicative £27bn ($46bn) cash-and-shares offer that would have given it a prized overseas tax domicile.
That an explicit proposal has been made is less surprising than the source of it: AbbVie, itself thought to be on the block since being spun off last year from Abbott Laboratories (AbbVie plays the game of wait and see, January 11, 2013). Analysts said they expect AbbVie to raise its bid, but believe it cannot go much higher.
Putting money to use
AbbVie’s third offer of £46.26 a share comprised 44% cash and 56% shares, a 23% premium to Shire's unaffected share price of £37.38 yesterday. That represents an outlay of £20bn for the Illinois-based company. Shire’s London-listed shares rose 20% to £44.70 in mid-afternoon trading following the announcement. AbbVie's were largely unchanged, standing at $54.21 in mid-morning trading.
Like all other US corporations, AbbVie cannot repatriate profits from overseas without being subject to taxes, and thus needs to put that cash to good use outside America. Humira, the biggest selling drug in the world, made only half its $12bn in sales in the US, and the premiere of AbbVie’s four-drug hepatitis C combination is expected to open another multibillion-dollar floodgate later this year.
AbbVie also carries about $14.4bn in debt to $7.7bn in 2013 earnings before interest, taxes, depreciation and amortisation, making it already highly leveraged. Thus any higher bid may be built around earnouts for pipeline projects such as lifitegrast, for which Shire has announced its intent to file for FDA approval.
Bernstein analyst Ronny Gal wrote this morning that he expects that a deal could be completed with a £50-a-share offer – which could be aided should AbbVie shares rise – but cautioned that even at £46.26 the deal looks expensive. His calculations suggest that such a deal could be dilutive in 2017 and 2018.
On the other hand, UBS analyst Guillaume van Renterghem calculated that the deal would be 4-5% accretive in 2016-2017, and “potentially higher if AbbVie earnings decline” as Humira potentially comes under threat from biosimilars in 2016 and its other blockbusters, testosterone treatment AndroGel and HIV pill Kaletra, face competition.
Mr Gal said he would have expected to see Shire negotiating with AbbVie.
“This sounds like a fair offer and we are surprised that Shire do not seem interested in engaging with AbbVie,” Mr Gal wrote. “We believe that if Shire want more than £46 per share (ADR $230) it may be difficult for anyone to pay that.”
Under UK takeover rules, AbbVie now has until July 18 to make a firm offer or withdraw from the bidding.
M&A defence and offence
Shire has been the subject of takeout rumours for some time, and talk has escalated in recent weeks as AstraZeneca and Allergan have sought to repel hostile endeavours. Both have been fingered as potential suitors for Shire.
Mr Gal suggested that the deal might be more accretive at the £50-a-share threshold for Allerga than Abbvie, although he said the Botox maker might have difficulty competing in a bidding war.
The issue of tax domicile is not mentioned in AbbVie’s notice this morning, leaving it to Ireland-domiciled Shire to state that the proposed offer would result in a new company subject to UK tax law. AbbVie likely has learned from Pfizer’s abortive Astra takeout, in which talk of tax benefits only inflamed opposition (Vantage point – Pfizer bid ignites tax debate but fixes are distant, May 8, 2014).
With a published 2013 tax rate of 22.6%, AbbVie would do well to seek a lower rate by securing the overseas domicile. It is already below the UK’s statutory 25% rate; Shire achieved a 16% rate.
AbbVie has been the first big pharma name to confirm an interest in this battle, confirming that Shire is indeed in play among the largest companies. Mr van Renterghem said the list of US companies small enough to benefit from the tax domicile but large enough to buy Shire is short, consisting of Biogen Idec, Eli Lilly, Celgene and Abbott Laboratories as well as Abbvie and Allergan.
In rejecting AbbVie’s entreaties, Shire may be counting on those companies to join the fray.
To contact the writer of this story email Jonathan Gardner in London at firstname.lastname@example.org or follow @JonEPVantage on Twitter