What's holding up the Shire-Baxalta deal? One word: Taxes

Shire CEO Flemming Ornskov

Shire ($SHPG) and Baxalta ($BXLT) both reportedly want to make a tie-up happen. So what's taking so long?

According to the Financial Times, the potential deal now hinges on Shire's ability to put cash in the mix without triggering a hefty tax bill. And the Dublin drugmaker won't be proceeding until it's "highly confident" in the advice it receives, the newspaper's sources say.

Shire initially approached its target with an all-stock bid--one that would have avoided violating U.S. rules that forbid spinoffs--such as Baxalta, which separated from parent Baxter ($BAX) this summer--from funneling tax-free cash to shareholders. But Baxalta wasn't interested in an all-stock deal, and now, Shire is working with advisers to make sure adding cash to its offer won't create a liability.

If it does, Shire could always argue against it in court, where it would have to prove Baxter wasn't planning to use the spinoff for tax avoidance all along, Bernstein analyst Ronny Gal pointed out in a note to shareholders. On that front, Shire has a couple points going for it. "Baxter didn't know that Shire was interested, and from its incorporation documents it is clear that Baxalta does not want to be bought," he wrote.

Before it takes that risk, though, Shire likely needs some clarity on a couple items, Gal figures. For one, it needs to make sure there's no "aberrant email somewhere suggesting that internally Baxter thought the Baxalta spin-out may lead to its profitable acquisition." And it also probably wants to know "the exact magnitude of its tax exposure," as well as whose rights and responsibilities are whose if the IRS comes calling.

If Shire can get that all figured out, CEO Flemming Ornskov may wind up sealing the deal he's been chasing for months. As Bloomberg recently reported, Shire is offering to fork over between $46.50 and $48 per share for the Illinois pharma--a price that values the company at around $32 billion.

Not everyone is as gung-ho about the potential acquisition as Ornskov, though. Gal, for one, has pointed out that several companies have new-age hemophilia treatments coming up the pipeline that'll threaten Baxalta's top dogs. "Success of alternative approaches could devastate" Baxalta's business, he wrote last month, predicting that 40% or so could take a direct hit.

- read the FT story (sub. req.)

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