It might be too soon to write an epitaph for AbbVie’s bid to buy Shire, but it is safe to say that the current offer is dead. Tightening tax rules have forced the US predator to reconsider the price of its quarry and the attendant ability to domicile on British soil, and the outcome of its manoeuvring depends on whether a new deal can be assembled that allows both sides to feel like they have come away winners.
This will be a difficult task, and with Shire remaining an attractive target other suitors are certain to re-emerge while AbbVie’s directors play with their calculators. A heavy break fee of $1.6bn looms large over the remaining discussions, so a factor in the economics of unwinding the deal will be whether AbbVie can argue its way out of some of the compensation.
In explaining that it was reconsidering the transaction, AbbVie pointed specifically to a set of US tax regulations that have changed the benefits of the deal. Among them was clamping down on the repatriation of overseas cash by designating taxable dividends from overseas subsidiaries as tax-free or “hopscotch" loans (New US anti-inversion rules spark investor flight, September 23, 2014).
The coincidence of Ireland just yesterday having announced a crackdown on another practice known as the “double Irish” is difficult to ignore. Citing UK takeover rules on the pending deal, the Chicago-based group has deflected questions about its use of the practice, which allows companies with subsidiaries subject to Ireland’s 12.5% tax rate to avoid even that low levy by establishing further sub-subsidiaries in tax-free jurisdictions.
Given Shire’s current status as an Ireland-domiciled, British-headquartered corporation, it is an obvious question that for now will go unanswered. Suffice it to say AbbVie was expecting a significant drop in its tax rate as a result of the takeout, from a reported 22.6% in 2013 to 13% in 2016. The UK domicile it was seeking will account for at least part of this reduction (AbbVie brushes off US talk and sweeps up Shire, July 18, 2014).
The effect on the market was swift. Shire shares plummeted 24% to £39.31 in mid-afternoon trading. AbbVie was off 2% to $52.97 in early US trading. The former Pfizer target AstraZeneca was another victim of the uncertainty, dropping 2% to £43.07, while such rumoured targets as Smith & Nephew and Actelion also saw their stock fall.
The notification from AbbVie invokes a meeting of its board on Monday to consider modifying the offer. Modification would not constitute a lapse under UK takeover law – that only happens in the event that AbbVie shareholders reject the modification or if the offer lapses afterwards, triggering the break fee. Given the inflexibility of UK takeover laws, AbbVie might not have much room to modify its offer.
For AbbVie to be willing to risk having to write a big cheque, the lost tax benefit now being forecast by its financial consultants must be greater. This morning, Bernstein analysts wrote that the ban on hopscotch loans would make it more difficult to access about $7bn of overseas cash, requiring it to borrow more as AbbVie feels the bite of the £14.6bn ($23.3bn) cash outlay from the acquisition.
In addition, the tax rate might not drop as quickly as AbbVie originally expected because the new regulations could make it more difficult to free overseas AbbVie units from US tax law. In total, the Bernstein analysts suggested that the total impact of the changes to tax regulations would be $2.1bn through 2020.
Then there is the strategic rationale for buying Shire, which centres on AbbVie’s need to secure its portfolio of rare disease products to help defend against expected biosimilar incursions to Humira, the world’s biggest-selling drug, starting as early as 2016.
This was the justification given by sellside analysts who today widely predicted that the deal would hold together. Given how changes in tax laws have shaken markets in recent weeks, this faith is not necessarily shared by investors.
If a modified deal does win the day, it might not be the result of savvy dealmaking as much as it is an unwillingness to unwind now that the two companies have become enmeshed. In that scenario, however, one wonders how Shire investors can come away smiling.