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LONDON (Alliance News) - Irish drug company Shire PLC Wednesday said it thinks AbbVie Inc should proceed with its recommended GBP32 billion takeover offer for the company, and noted that Shire would be due a break fee of about USD1.64 billion if the deal is called off, but its shares lost a quarter of their value on fears the deal will fall through.
US drug maker AbbVie said late Tuesday that it intends to reconsider the recommendation made to its shareholders to adopt the takeover agreement to acquire Shire amid proposed tax rule changes in the US. It had sent Shire a notice about its intention to withdraw or modify its recommendation.
The move comes after a flurry of takeover offers from US companies in the pharmaceutical sector targeting British peers. The US companies were all pledging to incorporate the combined companies in the UK to take advantage of lower tax rates, a practise known as an inversion deal, as the US corporate tax rate is roughly double that of the UK. This prompted US authorities to move to crack down on the practise.
On September 22, US Treasury Secretary Jacob Lew announced new measures to make tax inversions less appealing, including a ban on companies using foreign cash without paying US taxes. The regulations are not retroactive, but came into effect immediately, meaning that they would apply to AbbVie's deal for Shire.
AbbVie said it would consider, among other things, the impact of the US Department of Treasury's rule changes, "including the impact to the fundamental financial benefits of the transaction".
AbbVie's board will meet on October 20 to makes its decision, making it clear that it has not yet withdrawn its offer, which values Shire at GBP32 billion, or USD54.7 billion. Although the company will have to pay a hefty break fee if it backs out of the deal, if AbbVie's shareholders vote down the deal it will only have to pay USD500 million.
In its response Wednesday, Shire said its board will meet to "consider the current situation" and it will make a further announcement in due course.
"The board of Shire has not been provided with a detailed analysis of AbbVie's tax assumptions and AbbVie's notice does not quantify the anticipated financial impact of the US Treasury Notice on the combination," it said.
Accendo Markets analyst Michael van Dulken noted that the USD1.6 billion break fee is "far from compensation for the GBP10 billion market capitalisation gains (40% share price rise) which many considered to be in the bag with the deal set to close in the fourth quarter."
Moreover, van Dulken also noted the broader potential effect AbbVie's cold feet.
"The potential for a 20 October modification of the deal or indeed a full withdrawal is likely to have a significant knock-on for sentiment towards corporate activity given how this year?s strong flow of M&A helped markets towards recent highs," van Dulken warned. "Beware the fallout."
Earlier this year, AstraZeneca PLC successfully fended off a GBP69 billion takeover attempt by US rival Pfizer Inc, an attempt that was put down to the attractiveness of incorporating the proposed new company in the UK for tax purposes. There was also speculation Pfizer could return with a bid later in the year, but this has so far failed to materialize.
Smith & Nephew has also been the subject of takeover speculation for many years, most recently with suggestions that it might be pursued by US device maker Medtronic Inc, after Stryker Corp said in May that it does not plan to make an offer for the company. The stock has a bid premium priced in, analysts say, but no bid has been forthcoming.
Shire's shares were down 24.5% at 3,881.84 pence early Wednesday, by far the worst performing stock on the FTSE 100.
Shire will be announcing its third quarter results on October 24.
By Steve McGrath; stevemcgrath@alliancenews.com; @stevemcgrath1
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