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More than £8bn was wiped off the stock market value of Shire after US suitor AbbVie said it was reconsidering its $54bn (£34bn) takeover of the UK drug company.
The deal could become the biggest to be wrecked by the White House’s clampdown on tax inversions.
Shares in Shire, best known for its hyperactivity drugs although it now focuses on rare diseases, crashed 28%, or £14.40, to £36.90, making it the biggest faller on the FTSE 100 index. Shares in AstraZeneca, also a takeover target, fell 4.1% while hips-and-knees maker Smith & Nephew slid 3.1%.
AbbVie said its board would meet next Monday to reconsider the recommendation made to shareholders in July to vote for the merger agreement, which would create one of the largest pharmaceutical companies in the world. The Chicago-based firm had planned to shift its tax base from the US to Britain as part of the deal to cut its corporation tax rate from 22% to 13% by 2016.
Last month US Treasury officials unveiled new rules to make it harder for American companies to complete tax inversion deals. The measures bar companies from using cash held overseas to fund such takeovers. Burger King’s planned $11bn purchase of Canadian coffee and doughnut chain Tim Hortons reignited the debate over inversions, which Barack Obama has denounced as unpatriotic.
Referring to the new tax rules, AbbVie said it would discuss the “impact to the fundamental financial benefits of the transaction” and consider whether to withdraw or modify its recommendation.
Some analysts speculated whether the takeover could be renegotiated, while others think it is dead in the water.
Richard Hunter, head of equities at Hargreaves Lansdown stockbrokers, said: “The likelihood of the AbbVie/Shire deal has all but disappeared judging by the market reaction, whilst the possibility of Pfizer approaching AstraZeneca anew must also be in serious jeopardy, both falling foul of the potential tightening of US tax inversion laws.”
AbbVie will have to pay a hefty break fee of $1.6bn to Shire if it decides to walk away from the deal.
US hedge funds including Paulson & Co and Elliott Capital, which have been buying up Shire’s shares, will be among the losers if the takeover collapses.
Mike van Dulken, head of research at Accendo Markets, said: “Shareholders in Shire must be doing a double-take this morning with shares back trading at mid-June levels. It still stands to pick up a handsome $1.6bn in deal break fees.
“However, that’s far from compensation for the £10bn market cap gains (40% share price rise), which many considered to be in the bag with the deal set to close in the fourth quarter.”
Shire said it was notified overnight by AbbVie of its plans, but said the US company had not quantified the anticipated financial impact of the clampdown on tax inversions.
“The board of Shire believes that AbbVie should proceed with the recommended offer on the agreed terms in accordance with the cooperation agreement,” the UK company said. Its board will meet to discuss the situation.
Shire executives, led by the chief executive, Flemming Ornskov, would net £19m in retention payments if the deal went ahead.
Savvas Neophytou at Panmure Gordon still expects the deal to go through. He notes the anti-inversion changes will require Senate support and “this is far from being a certainty and will likely take considerable time”.
Ana Nicholls, healthcare analyst at the Economist Intelligence Unit, said that tax savings aside, there are other benefits to the deal. AbbVie faces patent expiry on its main product, Humira for rheumatoid arthritis, the world’s top-selling medicine. Shire has a strong lineup of hyperactivity drugs, along with a promising portfolio of drugs for rare diseases.
“This is only a rethink, in short, and AbbVie’s board may instead recommend a modification of the deal – which could mean trying to renegotiate the price or change other terms of the deal,” Nicholls said.
Other US companies looking to redomicile abroad to make huge tax savings include Pfizer, whose £69bn attempt to buy AstraZeneca, Britain’s second-largest pharmaceutical firm, failed in May. The Viagra maker could come back with a new bid late next month after a six-month cooling-off period expires.
Two days ago, Ohio-based Steris, which sterilises medical equipment for hospitals, agreed to buy Swindon-based Synergy Health for $1.9bn in a deal that would shift its tax domicile to the UK, cutting its tax rate from 31% to 25%. It is the second planned inversion deal announced since the Obama administration tightened its rules. The top federal corporate tax rate in the US is 35% while the average in Europe is 20%, according to Douglas S
Shire is scheduled to publish third-quarter results next Friday. Following record quarterly revenues in the second quarter, trading has remained strong, it said.
