Shire’s stock plunged the most in 12 years after AbbVie said its board will meet by Oct. 20 to reconsider its recommendation that shareholders approve the deal. The U.S. company cited changes to tax regulations announced Sept. 22 by the U.S. Treasury Department. AbbVie expected to lower its tax burden by buying Shire and moving its legal address to the U.K. The deal should proceed, Shire said in a separate statement.
AbbVie’s announcement surprised investors, since
the North Chicago, Illinois-based company told employees last month the purchase would go ahead. The proposed deal, announced July 18 and part of a wave of similar moves this year, would be the biggest inversion if it is completed.
“Investor reaction is one of confusion and shock and we hope this will be resolved quickly,” Jeffrey Holford, an analyst at Jefferies LLC in New York, wrote in a report today. “The limited communication from AbbVie is exacerbating the level of concern.”
Shire Plunges
AbbVie’s board 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. AbbVie also would gain Shire’s treatments for attention deficit hyperactivity disorder to diversify its drug portfolio.
Shire Plc Reminyl XL 16mg prolonged release capsules.
Shire’s depressed stock price may allow AbbVie to come back with a lower offer, said Sam Fazeli, an analyst at Bloomberg Intelligence. Shire may also become attractive to a company outside the U.S. that won’t be fazed by the new rules, he said.
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.
‘Bad Sign’
AbbVie’s decision to reconsider the Shire purchase indicated to some investors that other tax inversion deals are less likely.AstraZeneca Plc (AZN), a London-based drugmaker that spurned a takeover offer from Pfizer Inc. (PFE) this year, dropped 3.4 percent to 42.56 pounds. Pfizer has considered a renewed approach, or bidding for Actavis Plc, another deal that would allow the company to move overseas and reduce its taxes, people with knowledge of the matter said last month.
Shire logos sit on a bottle of Elvanse 50mg tablets, produced by Shire Plc.
Shire would be owed a $1.6 billion breakup fee if AbbVie’s board changes its recommendation and shareholders don’t approve the deal, Shire said today.
U.K. Home
Jennifer Smoter, an AbbVie spokeswoman, declined to comment beyond the company’s statement. Ben Atwell, a spokesman for Shire at FTI Consulting, didn’t immediately return calls seeking comment.AbbVie is the second Chicago-area company to reconsider moving for tax purposes. Walgreen Co., the biggest U.S. drugstore chain, considered moving overseas as part of its purchase of Alliance Boots Gmbh before announcing it would stay in the U.S. The company was pressured to stay by politicians including Illinois Senator Richard Durbin.
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.
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.
Hopscotch Loans
Notably, they prevent so-called 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.
While the tax rule changes make the planned merger less attractive, “we believe that AbbVie could argue that the rules should not apply to it because the merger was based on other strategic priorities, such as diversifying the business from Humira or improving its pipeline in attractive specialty markets, and that it is not fair for the Treasury to change the rules after the deal has been announced,” Alex Arfaei, an analyst with BMO Capital Markets, wrote last month in a report.
“Moreover, it is not clear to what extent AbbVie’s expected tax savings after inversion would be impacted by the tactics outlined by the Treasury,” he wrote.
AbbVie said it must hold a shareholder meeting to consider the adoption of the deal unless Shire and the governing U.K. Takeover Panel agree otherwise. “AbbVie’s offer will lapse if the company’s stockholders do not adopt the agreement,” the company said.
The company relies on its best-selling Humira, a rheumatoid arthritis injection, for more than half of its revenue. It is developing a hepatitis C pill to compete with Gilead Sciences Inc.’s Sovaldi.
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