New tax-dodge rules prompt AbbVie to seek more Shire financing: sources

(Bloomberg) — AbbVie Inc. is examining plans to raise additional financing to complete its takeover of Shire Plc, after U.S. officials imposed new obstacles to so-called tax inversion deals, people with knowledge of the matter said.

AbbVie may seek to borrow as much as $7 billion more than it originally anticipated because of new restrictions on using cash held offshore, two of the people said, asking not to be identified discussing a private matter. The deliberations are at an early stage, and are part of a comprehensive review of the Shire transaction’s structure after U.S. Treasury Secretary Jack Lew announced measures to make inversions more difficult this week, the people said.

President Barack Obama’s administration is looking at ways to halt a wave of acquisitions that allow U.S. companies to move their legal address overseas, potentially eroding the corporate tax base. The rules imposed this week, which Lew said are within the powers of the executive branch to enact without Congressional legislation, will make it more difficult for U.S. companies to finance inversion deals by using cash they hold overseas, beyond the reach of American taxes. While offshore money can still be used under the new regulations, it would be subject to a 35 percent tax rate.

Shire shares climbed as much as 3.5 percent, reversing earlier trading losses, and closed 1.7 percent higher at 53.30 pounds ($86.61). AbbVie rose as much as 1.9 percent and was trading at $58.48 at 11.54 a.m. in New York.

CREDIT RATINGS

No final decision on how to proceed has been made by AbbVie, which is still waiting for details on how the Treasury rules will be implemented and examining several scenarios, the people said. The company is working with advisers to gauge the cost of any increased borrowing, as well as its impact on credit ratings and the deal overall, one of the people added.

A spokeswoman for AbbVie said in an e-mail that rumors of AbbVie seeking additional financing are untrue. She declined to comment on whether the company would stand by the deal or walk away. A spokeswoman for Shire declined to comment.

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AbbVie is still committed to completing the $55 billion merger, the people said. In addition to tax benefits, AbbVie would get Shire’s drugs for attention-deficit disorder and rare diseases, diversifying its own portfolio.

The measures announced by Lew on Sept. 22 impose curbs on loans or cash transfers from offshore subsidiaries to a new foreign parent — which AbbVie would create by setting up a U.K.-domiciled company after buying Shire. The headline rate of tax on U.S. corporate earnings is 40 percent, compared with 21 percent in the U.K.

AbbVie, which is based in North Chicago, Illinois, hasn’t disclosed how much offshore cash it intended to use to finance the Shire purchase. As of the second quarter of this year, the company held about $10.2 billion in cash and equivalents, according to data compiled by Bloomberg, which analysts, including Jeffrey Holford at Jefferies LLC in New York, estimate is mostly held outside the U.S.

‘EARNINGS STRIPPING’

The overall impact of the new U.S. rules on inversion deals isn’t yet clear. Pfizer Inc., the largest U.S. drugmaker, is still seeking acquisition targets that would allow it to move out of the U.S., and recently approached Actavis Plc about a combination, people familiar with the matter said earlier this week. Canadian coffee-and-doughnuts chain Tim Hortons Inc., which is being acquired by Burger King Worldwide Inc. in an inversion merger, has said the deal will proceed despite the restrictions.

So far, the U.S. has stopped short of targeting the most lucrative elements of inversion deals such as so-called “earnings stripping,” which allows companies to lower taxable U.S. profits by shifting them to foreign subsidiaries. Attempts to introduce stricter measures may have to wait for comprehensive tax reform legislation in Congress, where Republicans and Democrats have been unable to agree on a way forward.