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Wednesday, 30 July 2014

Endo-round

M&A gets greedy in cross-border pharma deal

Greed is seeping into the art of M&A. Endo Health Solutions is the latest buyer to receive a warm welcome for a sensible acquisition with notable synergies. Its market value jumped almost as much as the $1.6 billion purchase price for Paladin Labs. But the deal also involves a huge tax dodge and investors aren’t factoring in enough risk.

This is no straightforward takeover. Endo is based in Malvern, Pennsylvania, and Paladin in Quebec. Because it is buying an overseas company that will wind up holding more than 20 percent of the combined equity, Endo reckons it can “invert” to a different location altogether. The plan is to create a new holding company based in Ireland that will own both Endo and Paladin. This maneuver should slash Endo’s typical tax rate of over 30 percent to 20 percent, and eventually maybe to as low as 12.5 percent.

The extra money will goose the bottom line and give Endo an edge over many peers when pursuing future deals. The 28 percent rise in Endo’s shares suggests investors are counting on additional M&A. Rival Valeant, whence Endo’s newish chief executive hails, uses a similar strategy. An acquisition binge has led its stock to surge 10-fold since 2008.

Endo is pushing boundaries, both literally and figuratively, to attain extra value. It’s paying a 20 percent premium for Paladin, which works out to about $270 million. Endo reckons operational synergies and tax savings combined, after taxes, are at least $75 million a year. Assume half that derives from the tax jurisdiction change and there would still be savings worth $375 million to investors, with Endo’s share more than covering the cost of the premium.

That wasn’t enough, though, just as it wasn’t for U.S. drug maker Perrigo when it agreed in July to buy Elan for $8.6 billion. Perrigo, too, is reaping tax savings by incorporating the combined company in its quarry’s home base of Dublin. Endo’s move is more audacious given the fact neither company is Irish. With governments facing fiscal constraints and tax avoidance squarely in the crosshairs, acquirers can’t expect their boldness to be overlooked.

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Context News

Endo Health Solutions said on Nov. 5 it had agreed to buy Paladin Labs in a deal valued at about $1.6 billion. Approximately 98 percent of the price will be paid in stock. The agreed price, C$77 per share, represents a 20 percent premium based on Paladin’s closing price on Nov. 4.

As part of the transaction, both companies will be acquired by a newly-formed Irish holding company. Endo investors will own approximately 77.5 percent of the combined company.

Each share in Paladin at the time of closing will also receive one share of Knight Therapeutics, a company that will be spun out as part of the deal. Knight is working on a drug for the treatment of leishmaniasis, a parasitic disease prevalent in the tropics.

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