AbbVie inversion story nears finale as Shire board backs bid

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AbbVie’s bid to take over Shire has proceeded in a more predictable way than a couple of recent attempted mergers, with the UK group’s board having recommended a revised proposal of $54bn today that will almost surely seal the deal.

With no white knight emerging, a sweetened bid on the table and a deadline quickly approaching, it was time for Shire executives to get serious about negotiating over the weekend. The near-complete deal crucially adds £2 cash per share to bring the offer to £24.44 ($41.83) in immediate return for Shire shareholders, and bumps the per-share value to £53.20, offering a healthy 42% premium on the price the day before AbbVie’s proposal first emerged.

Showing the money

The offer represents a modest increase in the week since AbbVie refreshed its bid (AbbVie ups the ante but bid doubts cause Shire to fall, July 8, 2014). All of the increase in value in a week has come in the form of cash, although with the Illinois-based group’s share price sagging the equity component has also had to rise, from 0.8568 to 0.8960 AbbVie share for every one of Shire.

Crucially, Shire investors would comprise 25% of the new company’s shareholders, complying with current US law limiting “inversions” of US corporations to lower-tax jurisdictions. Shire has estimated it can drop its tax rate to 13% by 2016 by domiciling in the UK, a reduction on the 22.6% rate it paid in 2013.

In early trading today, AbbVie dipped 1% to $54.49 while Shire was up a modest 2% to £49.45 late afternoon in London. Traders seemed to be factoring in some residual risk of the deal falling apart, whether from a dispute on the price, dissatisfied Shire shareholders or outside intervention, notably from US lawmakers worried about continued erosion of the corporate tax base.

The AbbVie-Shire announcement emerged on the same day Abbott Laboratories, from which AbbVie was spun out, disclosed a further shrinkage of its pharmaceutical interests by shedding its developed markets branded generics division to Mylan – a deal that would allow Pennsylvania-based Mylan to seek the lower tax rates of the Netherlands (Abbott sheds generics to become majority medtech, July 14, 2014).

Fighting the last war

Under the UK’s takeover code, AbbVie has until Friday to make a firm offer or withdraw from bidding for six months. Today’s announcement of the proposed offer came from Shire, while its prospective suitor remained silent.

It could be taken as a sign of increased Shire enthusiasm, as it did not appear that the same confluence of events would help it stay independent as emerged with Pfizer’s earlier failed bid for AstraZeneca. The Vyvanse maker tried some similar gambits like playing up its pipeline to provoke an investor response, but has not had elected officials fighting its corner the way Astra had (Shire puts on rose-coloured glasses and outlines defence, June 23. 2014).

As an Irish-domiciled company with a payroll heavily tilted toward the US, Shire was not seen by politicians as a jewel of British R&D as was AstraZeneca and was thus not considered worth fighting for. Indeed, in contrast to Astra’s concrete commitment to opening laboratories in the UK, the “One Shire” reorganisation saw a trimming of R&D jobs at the Basingstoke, UK world headquarters. It was a sign of Shire’s strategic direction when chief executive Flemming Ornskov chose to base himself in Massachusetts rather than Basingstoke.

Nor has a counterbid emerged, as might have been expected in the current M&A frenzy. Allergan and Astra had both been suggested as potential suitors, but both have spent weeks battling their own unwanted overtures and may not have an appetite for R&D; meanwhile, any deals Shire could have executed to help defend itself were blocked under the UK takeover laws, something about which Mr Ornskov complained to the Wall Street Journal.

AbbVie needed constructive negotiations to avoid the quicksand into which Pfizer fell, and it got just that. Short of a late bidder entering with a higher offer, Shire should be next to fall.

To contact the writer of this story email Jonathan Gardner in London at jonathang@epvantage.com or follow @JonEPVantage on Twitter

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