|Treasury Secretary Jacob Lew|
Pfizer ($PFE) and AstraZeneca ($AZN), AbbVie ($ABBV) and Shire ($SHPG), Hospira ($HSP) and Danone. Those are a few of the merger pairs--actual or potential--that stand to lose from U.S. Treasury Secretary Jack Lew's new tax-inversion-fighting rules. Just take a look at AstraZeneca and Shire's market value today: together down $8 billion.
And then there are the potential targets--from the newly Irish Perrigo ($PRGO) and Actavis ($ACT), to Switzerland's Actelion ($ATLN)--that suddenly look less attractive. Actelion's shares took a big hit after Lew's announcement, too.
But the agreed-upon deal most threatened by Lew's proposal may be Mylan's ($MYL) purchase of drug rights from Abbott Laboratories ($ABT). That's because their deal includes a "spinversion" to take advantage of the portfolio's European domicile. Abbott would spin off the drug rights into a new Netherlands-based company; Mylan would buy that company and invert. Presto, lower taxes.
Lew's new rules are a "cautious" approach to the problem, as Sen. Charles Schumer pointed out to The New York Times. Without legislation, Treasury can only go so far. So, there's a switch to the qualifications for inversion--a more stringent 80-20 ownership requirement, for instance--and some new limitations on the advantages of such a deal. Tax-free access to overseas cash? Not so easy now.
Most importantly for Mylan and Abbott: Spinversions would apparently be verboten. The transaction hasn't closed yet, an important note, because the rules only apply from Sept. 22 forward. So, as Sanford Bernstein analyst Ronny Gal points out in a note to investors, "Mylan would need to consider its plans."
To Gal's way of thinking, the Mylan-Abbott deal wouldn't fix an access-to-cash problem--Mylan doesn't have one. Nor does Mylan now record a lot of profits outside the U.S. So, the rationale is all about "future strategy, not immediate value." Worst case for the deal? It terminates, and Mylan has to "go back to square one to rethink its expansion strategy."
ISI Group's Umer Raffat sees a way out, though, depending on dates and legal matters. If Abbott has already carved out those foreign products into a foreign corporation and transferred the stock--leaving Mylan to take the last step and buy that corporation--the deal might come in before the Sept. 22 cutoff. His worst case, put forth in a note to investors Tuesday? "Mylan will owe no more than $100 million to Abbott if the transaction were to be terminated."
The new inversion mentality may not be enough to derail AbbVie's Shire buyout automatically, because the ownership split is within the target zone. But Bernstein's Gal says the deal may lose its shine. "A higher tax rate than the 13% guided to by AbbVie ... would make the deal significantly less attractive, given the high price paid for Shire," Gal wrote in an investor note.
Enough for AbbVie to justify the breakup fee that's part of the deal agreement? Unclear at this point. Price negotiations could ensue.
And then there's the biggie: Pfizer and AstraZeneca. Some analysts--including Bernstein's Tim Anderson--figure that the rules may not get in Pfizer's way, at least not much. After all, Pfizer has anticipated this sort of move from the U.S. government. And the rules aren't so draconian, as Citigroup's Andrew Baum points out. "We continue to believe that Pfizer will re-engage with AstraZeneca," he wrote in a note to investors, "given the multiple strategic, cost and tax benefits that remain despite today's action."
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