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After the inversion rush

15 October 2014 By Neil Unmack

AbbVie’s U-turn shows its Shire deal was mostly about tax, after all. Despite initially holding firm as the Obama administration clamped down on tax-driven “inversions,” the American group has now cooled on a $55 billion takeover of its Dublin-based peer. There’s an unwelcome read-across for AstraZeneca.

AbbVie insisted the deal, agreed in July, made sense even after the tax changes in September. The group needs to cut its reliance on Humira, the arthritis drug. A week after the U.S. Treasury got tough, AbbVie Chief Executive Rick Gonzalez said he was more “energised” than ever about the deal.

It’s not clear why AbbVie changed course. The firm’s initial intransigence suggests it thought the clampdown could be circumvented, or left enough room for a workable deal. The volte-face implies it is now bracing for a broader offensive.

Reworking the deal will be hard. AbbVie could try to pay less, yet the UK Takeover Panel might not agree that tax changes should qualify as a “material adverse change.” The two companies could let the deal lapse, and then renegotiate, after AbbVie paid a $1.65 billion break fee. But Shire will be reluctant to sell out for much less. And AbbVie would struggle to get close to its previous premium of 18 pounds a share: Barclays estimates non-tax cost synergies between the two at just 4 pounds per share.

Shire’s board has just seen a quarter of the group’s market capitalisation vanish. So the pressure is on to realise value. A rival sale looks hard, though. Despite years of bid speculation, no rivals emerged during the AbbVie talks, and Shire’s focus on attention deficit disorder is a bit risky for some. Nor is the group cheap, at 18 times forward earnings, net of the break fee, versus a sector on 17 times. Shire’s best bet may be to pursue targets like NPS Pharmaceuticals.

AbbVie’s retreat makes it hard for any European board to approve a future inversion bid. And Pfizer looks even more unlikely to resume its pursuit of AstraZeneca, the biggest inversion of them all. Like Shire, Astra must ponder how to create value on its own.


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