AbbVie urges shareholders to reject Shire deal due to tax rule change
The board of directors of Illinois drug maker AbbVie Inc. recommended that shareholders reject the acquisition of European rival Shire, saying recent changes to U.S. tax rules eliminated some of the financial benefits of the $52-billion deal.
The decision late Wednesday probably puts an end to one of the most high-profile proposed inversions, in which a U.S. company buys a smaller firm in a lower-tax nation and reincorporates there to save money.
The collapse of the deal would be a victory for the Obama administration, which made technical revisions to tax rules last month to try to curb a wave of inversions that threatened to erode the U.S. tax base.
“Although the strategic rationale of combining our two companies remains strong, the agreed-upon valuation is no longer supported as a result of the changes to the tax rules, and we did not believe it was in the best interests of our stockholders to proceed,” said Richard Gonzalez, AbbVie’s chairman and chief executive.
Shire, based in Dublin, Ireland, said Thursday that its board “was considering the current situation and a further announcement will be made in due course.”
AbbVie will have to pay Shire a $1.6-billion breakup fee if the deal falls through.
AbbVie said late Tuesday that it was reconsidering the purchase, causing Shire stock to tumble about 22% on Wednesday. AbbVie shares fell 0.9%.
On Thursday, Shire shares dropped an additional $4.39, or 6.9%, to $49.56 in trading in London. AbbVie stock fell $1.73 more, or 3.2%, to $52.90.
When the deal was announced in July, AbbVie said the purchase would reduce its overall effective tax rate to 13% in 2016 from 22.6% last year.
AbbVie planned to reincorporate on the British isle of Jersey, where Shire is incorporated for tax purposes. Jersey has no corporate income tax.
The U.S. corporate tax rate is 35%, the highest among the world’s most advanced economies.
Democrats and Republicans both want the rate lowered by eliminating some tax loopholes but have not been able to agree on how to do it.
Meanwhile, U.S. firms, particularly in the pharmaceutical industry, have sought inversion deals to escape the high tax rate.
With bills to limit inversions stalled in Congress, the Obama administration took executive action last month to make the deals less financially appealing.
Last month, the Treasury Department eliminated some techniques, including so-called hopscotch loans that American companies with headquarters abroad use to gain access to foreign earnings without paying U.S. taxes on them.
Gonzalez, though, insisted at the time that the merger was not just for the tax benefit. In an email to Shire employees a week after Treasury unveiled the anti-inversion tax changes, he expressed optimism the deal remained on track.
This week, however, AbbVie said its board had assessed the effect of Treasury’s “unilateral changes to the tax rules” and determined they introduced an “unacceptable level of uncertainty” to the Shire deal.
Among the concerns was that “the changes eliminated certain of the financial benefits of the transaction, most notably the ability to access current and future global cash flows in a tax-efficient manner as originally contemplated in the transaction,” AbbVie said.
