Bankers push ‘tax-dodge’ M&A

US bankers and lawyers are inciting a sense of urgency among corporate clients to get tax-reducing acquisitions of offshore companies signed before the end of this year, now that a slew of recent so-called tax-inversion trades has set off alarms in Congress.

Heated debates about how to limit such acquisitions broke out last week, as senators reacted during a hearing to the recent slew of deals announced by Mylan, AbbVie, Salix Pharmaceuticals and Medtronic.

The Obama administration has proposed legislation that would severely restrict the ability of US companies to invert, and while the effective date is January 1 2015, US Treasury Secretary Jack Lew has called for the law to be made retroactive to May 2014.

Last week US Senate Finance Committee chairman Ron Wyden further fuelled the debate by accusing bankers of being in an “inversion feeding frenzy” and alluded to as many as 25 more possible tax-motivated M&A deals in the pipeline.

Threats of retroactivity have led bankers privately to urge corporates to get deals at least signed before the end of December this year.

“We are certainly encouraging clients not to waste any time if they are considering deals that include an inversion angle,” said a global head of mergers and acquisitions at one of the world’s largest banks.

According to Bernie Pistillo, a partner at Morrison & Foerster, a tax deal is unlikely to be passed until 2016, after the mid-term elections, and to the extent that there is anything retroactive, it would be back to 2015, not 2014.

“There seems to be a sense that if a deal is signed before the end of this year then it has less chance of being caught by any retroactive law,” said Pistillo.

Huge savings

So far this year there have been about nine inversion M&A trades closed or announced, the biggest wave of US companies moving offshore their tax home since 2012.

The tax savings can be huge: AbbVie’s acquisition of Shire for US$53.6bn is expected to reduce AbbVie’s corporate tax rate to around 13% by 2016, compared with 22% in 2013.

Gaining access to cash piles is as much of a driver as the tax savings. US companies can use offshore cash to pay for share repurchase programmes, and Medtronic will be able to use its overseas cash to finance its US$42.9bn purchase of Covidien.

“These drug companies pile up huge cash hoards overseas that they cannot access without paying taxes to repatriate the funds,” said Carol Levenson, a credit analyst at Gimme Credit. “Obviously if they can structure a deal so that they can use these funds without paying taxes on the repatriation, they will strongly consider it.”

Pfizer is clearly a candidate for an inversion deal, given that its failed bid for AstraZeneca was largely for the tax benefits. Walgreens is also said to be exploring how it can reap offshore tax savings through its merger with Boots, while Ireland’s Perrigo, based in the most popular tax destination to date, is rumoured to have hired bankers to advise on acquisitions.

Although many of the biggest inversion trades have already been announced, Mylan’s US$5.3bn acquisition of Abbott’s non-US portfolio of generic drugs, and Salix’s US$2.7bn stock purchase of three drug patents from Italy’s Cosmo Pharmaceuticals, are harbingers of new inversion deal structures that do not require whole-company mergers.

“People are definitely looking for more creative ways to invert,” said a managing director of healthcare advisory at a major US bank. “We will see more creative structures because spins or acquisitions of select assets could make more strategic sense than a total merger.”

Many of the larger pharmaceutical companies could potentially sell off their portfolios of established drugs whose revenue growth rates have slowed as patents run out.

“Deals like Mylan’s and Salix’s have really opened the door for a lot more potential inversion deals,” said David Krempa, an equity analyst at Morningstar. “Now companies won’t have to be limited to Irish targets trading at high valuations.”

Inversions can also have a domino effect.

“One incentive to do a tax inversion is to remain competitive with those who have already done a deal and reduced their tax costs,” said David Steinberg, an equity analyst at Jefferies.