Pharma M&A: mean inversion

Do not drive or operate heavy machinery while trying to understand the US tax code. Shareholders in drugmakers are advised to wade in anyway.

They provide capital to a set of impeccably globalised companies already. Mergers designed to allow the acquirer to shift (or “invert”) its domicile outside the US for tax purposes push this further.

On Monday, the board of Shire – London-listed, Jersey-incorporated, Irish tax-resident – said that it was willing to recommend an improved £53 per share offer from AbbVie. The combined company would be taxed in the UK instead. So would the new Mylan, which said on Monday that it would invert by purchasing European assets from Abbott Laboratories.

The geography is dizzying. So is the premium AbbVie is offering for its target: 42 per cent. The deal terms would give Shire shareholders a quarter of the new company in exchange for contributing a fifth of revenues, plus £14bn in cash. Are the tax savings worth the premium?

Moving to a tax rate like Shire’s in 2013 could, in theory, increase AbbVie’s net income next year by $0.5bn. But this assumes that the rates paid by Shire (16 per cent) and AbbVie (22 per cent) were not abnormally low or high respectively. AbbVie’s rate may have been high after paying up to repatriate cash to the US that year.

A UK domicile would allow that cash to be used – or returned to investors – without pain, though. Shareholders could also bet that access to diversification via Shire’s specialised drugs portfolio would improve AbbVie’s multiple, creating value irrespective of tax savings.

Except acquirers’ shareholders have another tax to worry about: US capital gains. Mylan’s holders will record gains when they get shares in the new company as a consequence of inverting. That structure is also a feature of Medtronic’s deal for Covidien. A reason to check the rules – and then to ask whether this structure is a fair division of the inversion spoils.

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