Shire May Be Next Allergan in Inversion Pursuit

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By Laura Davison

Jan. 11 — Shire Plc, which agreed to buy Baxalta Inc. for $32 billion, could become an attractive inversion partner for a U.S. company as the Irish drugmaker gains size.

Shire agreed to buy Baxalta in a Jan. 11 deal that will lower the Bannockburn, Ill.-based company's tax rate to 16 percent to 17 percent from a predicted 23 percent, Chief Executive Officer Flemming Ornskov said in a call to investors. The bid to take over Baxalta, which makes treatments for the rare bleeding disease hemophilia, avoids the Treasury Department's inversion rules because Shire is the larger company.

“This brings them into the world of Allergan. Shire and Allergan could become the two best acquirers of U.S. pharma companies around,” Robert Willens, a tax consultant in New York, told Bloomberg BNA. “If Shire continues to make acquisitions of U.S. companies, they may get to a size to acquire a company the size of ‘a Pfizer', like Johnson & Johnson.”

Inversion Appeal

Pfizer Inc. and Ireland-based Allergan Plc agreed in November to merge in a $160 billion deal, forming the largest inversion in U.S. history. Large foreign companies are appealing for inversion deals, because Treasury's inversion consequences kick in when U.S. shareholders own at least 60 percent of the combined company (244 DTR G-8, 12/21/15).

As long as the U.S. doesn't pass new laws changing inversions, Shire is eligible to seek to merge with a larger U.S. company as soon as 2017, said Sam Fazeli, who directs European research for Bloomberg Intelligence.

Treasury and Internal Revenue Service officials have said the government plans to propose in coming months more than 150 pages of regulations addressing inversions. The rules will combine the provisions outlined in Notice 2014-52 and Notice 2015-79, issued in recent years to stem the tide of corporations opting to reduce tax bills by inverting (244 DTR G-8, 12/21/15).

Regulate Your Expectations

The rules won't be able to stop the deals entirely, and Congress isn't expected to pass anti-inversion legislation before the presidential election in November.

Shire isn't new to pursuing inversions. The Dublin-based company tried, and failed, to merge with AbbVie Inc. in 2014. The AbbVie merger plans, coupled with Medtronic Inc.'s inversion with Irish medical device make Covidien Ltd., spurred Treasury to release the first of the so-called “inversion notices” in September 2014. AbbVie's board withdrew from the deal a month after Notice 2014-52 was released.

The Baxalta acquisition comes with tax risks, in addition to the benefits. Shire, as the acquirer, will assume any tax liabilities tied to Baxalta's spinoff from Baxter International Inc. in July. Mark J. Enyedy, Shire's interim general counsel, told investors that the tax-free nature of the tax code Section 355 spinoff will be preserved because the transaction has a business purpose and isn't being used as a device to distribute profits to investors after Shire acquires the business.

“There is both the strong business purpose as well as the absence of an intent to allow” shareholders to sell for cash, Enyedy said. “We are comfortable with the tax position and importantly our counsel was in a position to deliver towards an unqualified level opinion.”

The spinoff could be viewed as a device if the IRS were to determine that Baxter knew about Shire's interest in buying the unit before the separation.

Cravath, Swaine & Moore LLP and Slaughter and May are advising Shire on the deal. Baxalta is advised by Jones Day.

To contact the reporter on this story: Laura Davison in Washington at ldavison@bna.com

To contact the editor responsible for this story: Brett Ferguson at bferguson@bna.com