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Yesterday’s Inversion Buyers Become Tomorrow’s Targets: Real M&A
2014-08-07 23:00:01.3 GMT
(For a Real M&A column news alert: SALT REALMNA <GO>.)
By Brooke Sutherland
Aug. 8 (Bloomberg) -- With a record number of U.S. tax-
inversion deals shrinking the pool of possible targets, the next
crop of acquirers may pursue their former American peers that
have already reincorporated abroad.
While the Treasury Department is taking heed of President
Barack Obama’s call to stop “corporate deserters” and weighing
ways to deter companies from making overseas acquisitions for
tax advantages, tax expert Robert Willens says it may only lead
buyers to accelerate their plans. U.S. firms that have moved
their legal addresses abroad present another option, according
to Jefferies Group LLC, after about 20 deals since 2010 reduced
the number of large, native European and Canadian candidates.
“You’re going to hear a lot of saber rattling on this
issue, but it’s going to be hard to do anything at least before
November, even from an executive level,” Kevin Kedra, a Rye,
New York-based analyst at Gabelli & Co., said in a phone
interview. “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 Co. and Actavis Plc alone have added a combined $44
billion in market capitalization 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 percent of the combined
firm. Once Salix Pharmaceuticals Ltd. closes its deal with Cosmo
Pharmaceuticals SpA and moves its mailbox to Ireland, it too
could top the target list, said Canaccord Genuity Group Inc.
Political Action
The Treasury said this week that it’s examining whether it
has 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 including Charles Rhyee of Cowen Group
Inc. Obama and the Treasury probably lack the power to do
anything as substantive as what Congress could to prevent these
deals, said William Dantzler, a tax partner at White & Case LLP.
The rule that allows an inversion “is in the statute plain
as day,” Dantzler wrote in an e-mail. “Only Congress could
change that.”
While news of the Treasury’s potential moves pressured
stocks of inversion-related companies, the best the Obama
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, said Willens, founder of tax and
accounting firm Robert Willens LLC.
Even so, “don’t take your time on these if you don’t want
to be caught holding the bag,” Willens said in a phone
interview.
Harder Hunt
Finding something to buy may not be as easy as it once was.
Since Valeant Pharmaceuticals International Inc. kicked off the
recent inversion frenzy with its 2010 purchase of Biovail Corp.,
targets from Elan Corp. to Shire Plc have been gobbled up.
There is an increasing scarcity “of companies to invert,
at least sizeable companies,” David Steinberg, a San Francisco-
based analyst at Jefferies, said in a phone interview. “There
are still some European-based companies that are current
standalones, which have not been inverted that could be. But a
lot of the targets now are effectively U.S. companies who are
domiciled in Ireland, like Perrigo.”
Reincarnated Targets
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, Steinberg said.
Abbott Laboratories, Bristol-Myers Squibb Co. and Eli Lilly &
Co. are among logical suitors, as they don’t compete with
Perrigo’s over-the-counter store labels, he said.
“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. Spokesmen for
Perrigo and Actavis declined to comment, as did representatives
for Abbott Park, Illinois-based Abbott and New York-based
Bristol-Myers.
Actavis, the world’s biggest generic drugmaker, could also
lure inversion interest from large pharmaceutical companies,
said Kedra of Gabelli. Actavis gained an Irish domicile when it
acquired Warner Chilcott Plc in 2013. The $54 billion company
bought Forest Laboratories Inc. this year to expand in brand-
name drugs, bolstering its appeal for some buyers, Kedra said.
Analysts said this week that Pfizer Inc. may be interested
in Actavis as an alternative to U.K.-based AstraZeneca Plc,
which rejected an offer from the $179 billion company in May.
Actavis has gained $37 billion in market value since announcing
the Warner Chilcott deal, making it large enough for Pfizer to
potentially make the inversion math work.
Bigger Options
Most companies that have ditched their U.S. addresses in
the past four years have gotten bigger. The collective market
value of those firms has increased by $129 billion since the
inversions were announced, data compiled by Bloomberg show.
“They can be a target for a very large company since
they’ve gotten pretty large themselves,” said Willens, the tax
expert. “It definitely feeds on itself.”
It’s not just expat pharmaceutical companies that could
become targets. Emerson Electric Co., valued at $43 billion
yesterday, could invert with a takeover of Tyco International
Ltd. or Pentair Plc, both former U.S. companies now based in
Europe, said Steven Winoker of Sanford C. Bernstein & Co.
With a tax rate higher than 30 percent and most of its cash
held abroad, “Emerson has the most to gain among our U.S.-
domiciled companies,” Winoker wrote in a June 20 report.
“Frankly, any of our companies that are left trapped in the
U.S. after this window closes might be looking at significant
money left on the table.”
Down the List
The at least nine inversion deals still pending could turn
more companies into takeover bait. In the absence of
legislation, the completion of Salix’s Irish reincorporation
will give the $8.5 billion company an added allure for buyers
that may have already been eyeing its portfolio of
gastrointestinal drugs, according to Corey Davis, a New York-
based analyst at Canaccord.
Auxilium Pharmaceuticals Inc., a $902 million maker of
treatments for curved penises, could also become a target after
it closes its inversion deal with Canadian biotechnology firm
QLT Inc., said Michael Yee a San Francisco-based analyst at RBC
Capital Markets, a unit of Royal Bank of Canada.
The Spinversion
U.S. companies also would have more options if they
explored a spinversion, a type of inversion in which a
conglomerate would spin off a portion of its business and
reincorporate that piece by combining it with an overseas
entity. Kimberly-Clark Corp., the $40 billion maker of Kleenex
tissues that’s already spinning off a health-care unit, would be
a candidate for such a transaction, Ed Outslay, an accounting
professor at Michigan State University, said by phone.
A representative for Dallas-based Kimberly-Clark declined
to comment, as did spokesmen for Tyco and Emerson. A
representative for Raleigh, North Carolina-based Salix didn’t
respond to request for comment. Neither did Auxilium and
Pentair.
The Downside
Smaller deals may be easier to carry out amid growing
backlash, said Kedra of Gabelli, a unit of Gamco Investors Inc.
Companies such as Actavis are still appealing inversion targets
for large buyers, though possible suitors including Pfizer will
now have to wrangle with an even bigger political spotlight, he
said.
The potential backlash was too much for Walgreen Co., which
said this week it won’t use its deal with Bern, Switzerland-
based Alliance Boots GmbH to move overseas. The drugstore
company is still planning to buy the 55 percent of Boots that it
doesn’t already own.
“The window is starting to close, and with Obama’s
movement, I think that’s accelerating the closure of that
window,” Damien Conover, a Chicago-based analyst at Morningstar
Inc., said in a phone interview.
Because Walgreen is a well-known consumer name, it was
probably more sensitive to political criticism. The drugstore’s
decision to not pursue an inversion may actually be a positive
for companies that are already in the middle of their own deals
or considering one, said Yee of RBC.
“It didn’t shake the boat even more with a major American
company doing it,” he said by phone.
U.S. companies with an inversion deal in mind that makes
sense still should act fast, said Dantzler of White & Case.
They would be “well-advised to accomplish it as quickly as
possible,” he said.
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--With assistance from Jennifer Surane in New York.
To contact the reporter on this story:
Brooke Sutherland in New York at +1-212-617-0448 or
bsutherland7@bloomberg.net
To contact the editors responsible for this story:
Beth Williams at +1-212-617-2307 or
bewilliams@bloomberg.net
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