Tuesday 23 January 2018

Prepare for tax inversion blizzard as Obama turns up the heat

Brooke Sutherland looks at what might happen to the US companies that have moved to Ireland already to exploit tax loopholes

U.S. President Barack Obama
U.S. President Barack Obama

Brooke Sutherland

US President Barack Obama renewed his calls last week for lawmakers to stop "corporate deserters", but experts have said the move could lead to a rush of tax-inversion deals in the next few months.

"The window is starting to close. With Obama's movement, I think that's accelerating the closure of that window," said Damien Conover, a Chicago-based analyst at investment research firm Morningstar.

While the law looks certain to change, with repercussions for Ireland, it won't happen overnight. "You're going to hear a lot of sabre rattling on this issue, but it's going to be hard to do anything, at least before November, even from an executive level," said Kevin Kedra, an analyst at Gabelli & Co. "These deals still make sense," he said. "There are a lot of quality companies out there that have done an inversion that could now be targets themselves."

Perrigo and Actavis alone have added a combined €33bn in their market capitalisation since announcing they were reincorporating abroad. The gains would make it easier for a larger rival to acquire them and meet the threshold for inversions that typically requires the foreign company's investors to end up with at least 20 per cent of the combined firm. Once Salix Pharmaceuticals closes its deal with Cosmo Pharmaceuticals and moves its mailbox to Ireland, it too could top the target list, said financial services firm Canaccord Genuity.

The US Treasury said last week that it's examining whether it had the authority to act on its own to curb inversions and bypass Congress, which is unlikely to act in the near term, according to analysts.

Mr Obama and the Treasury probably lack the power to do anything as substantive as what Congress could to prevent these deals, said William Dantzler of global law firm White & Case. The rule that allows an inversion "is in the statute plain as day," Mr Dantzler wrote. "Only Congress could change that."

While news of the US 
Treasury's potential move
 pressured stocks of inversion-related companies last week, the best Obama's administration could do is temper some of the financial benefits of such a deal - which isn't a straightforward process and probably won't be retroactive. Even so, "don't take your time if you don't want to be caught holding the bag," said one insider.

Finding something to buy may not be as easy as it once was. Since Valeant Pharmaceuticals International kicked off the recent inversion frenzy with its 2010 purchase of Biovail, targets from Dublin-based Elan to Dublin-based Shire have been gobbled up.

There is an increasing scarcity "of companies to invert, at least sizeable companies," said David Steinberg, an analyst at global investment bank Jefferies. "There are still some European-based firms that are standalones, which have not been inverted that could be. But a lot of the targets now are effectively US firms domiciled in Ireland, like Perrigo."

Perrigo, which moved its legal address to Ireland last year with its purchase of Elan, is attractive because of its dominant store-brand business model and strong cash flow, Mr Steinberg said.

Abbott Laboratories, Bristol-Myers Squibb and Eli Lilly are among logical suitors, as they don't compete with Perrigo's over-the-counter store labels.

"As it relates to inversion, if that ever did come about, it would be a secondary benefit, not the primary driver of us taking any type of M&A action," said Edward Sagebiel, a representative for Indianapolis-based Eli Lilly.

Actavis, the world's biggest generic drugmaker, could also lure inversion interest from large pharma companies, said Mr Kedra. Actavis gained an Irish domicile when it acquired Warner Chilcott in 2013. The €40bn firm bought Forest Laboratories this year to expand in brand-name drugs, bolstering its appeal for some buyers, he added.

Analysts said last week that Pfizer may be interested in Actavis as an alternative to UK-based AstraZeneca, which rejected an offer from the €134bn company in May.

Actavis has gained €28bn in market value since announcing the Warner Chilcott deal, making it large enough for Pfizer to potentially make the inversion math work.

Most companies that have ditched their US addresses in the past four years have become bigger. The collective market value of those firms has increased by €96bn since the inversions were announced.

"They can be a target for a very large company, since they've gotten pretty large themselves," said Mr Willens, the tax expert. "It definitely feeds on itself."

Expect a few more record-breaking deals and bumper profits in Dublin law firms for some time to come.



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