Shire shares plummet as AbbVie hints at exit from $54 billion deal

By Mary Lee

Shire PLC lost 30 percent of its value in stock market trading Wednesday after AbbVie Inc. said it would reconsider its planned $54 billion acquisition of the Dublin-based drug company.

The deal, which Shire urged AbbVie not to abandon, would reincorporate the Deerfield, Ill.-based pharmaceutical company overseas in a move known as a tax inversion.

AbbVie announced late Tuesday that its board of directors will meet next week to reconsider the deal in light of new regulations issued by the U.S. Treasury Department Sept. 22 aimed at discouraging inversions. If it decides to cancel the deal, AbbVie will owe Shire $1.64 billion in break-up fees.

“Investor reaction is one of confusion and shock and we hope this will be resolved quickly. The limited communication from AbbVie is exacerbating the level of concern,” analysts at Jefferies LLC wrote in a report.

The announcement was an abrupt about-face for AbbVie CEO Richard A. Gonzalez, who two weeks ago wrote to Shire employees expressing confidence in the merger, announced July 18.

In a corporate inversion, a U.S. company merges with a foreign entity and moves its domicile to the foreign country in order to adopt the lower tax structure there.

AbbVie has said the merged enterprise would provide it greater access to the European Union and reduce its effective tax rate to about 13 percent by 2016 from 22 percent currently.

Analysts said the deal would also help offset expected revenue declines from the loss of patent protection for AbbVie’s blockbuster arthritis drug, Humira, in December 2016.

If AbbVie’s board of directors decides not to complete the deal, it will be a victory for the Obama administration, which has been outspoken in its opposition to corporate inversions.

Since 2012, 14 companies have abdicated their U.S. citizenship and relocated to lower-tax countries, such as Bermuda and Ireland. Eight more companies, with more than $200 billion in market value, plan to complete inversions this year, according to Bloomberg L.P. data.

Bermuda and Ireland represent the top two countries inverted companies relocate to. (Data source: Bloomberg) Chart created by Mary Lee
Bermuda and Ireland represent the top two countries inverted companies relocate to.
(Data source: Bloomberg)
Chart created by Mary Lee

The U.S. corporate tax rate of 35 percent is among the highest in the world, although many companies pay a lower effective rate due to tax breaks.

On Sept. 22, the U.S. Department of the Treasury announced new regulations that it said would reduce the tax benefits of corporate inversions and significantly diminish the ability of inverted companies to escape U.S. taxation.

“For some companies considering mergers, today’s action will mean that inversions no longer make economic sense,” the U.S. Treasury said in a statement.

Also Tuesday, Ireland’s finance minister, bowing to international pressure, announced the country would plug a large corporate-tax loophole known as the “Double Irish with a Dutch Sandwich” in its 2015 budget.

Colloquially known as the Double Irish, the parent company establishes an Irish subsidiary, which is then controlled by outposts in tax havens such as Bermuda. It allows companies to channel profits to the tax havens where they hold intellectual property, resulting in tax-deductible royalty payments.

“I am abolishing the ability of companies to use the ‘Double Irish’ by changing our residency rules to require all companies registered in Ireland to also be tax resident,” said Michael Noonan, Ireland’s finance minister in a parliamentary address.

The rules go into effect January 2015 for new entrants, while firms already organized under the Double Irish scheme have until 2020 to restructure.

It is unclear how Ireland’s crackdown on the Double Irish tax avoidance would affect the AbbVie-Shire deal, said Alex Arfaei in a BMO Capital Markets report.