* Rules unlikely impact Shire completion. Pot’l barrier to AZN
The US treasury announced new measures overnight intended to dis-incentivise tax
inversion deals such as the proposed merger of US pharma Abbvie and Shire and
the previously failed bid for AZN by Pfizer (PFE). The new measures (here) are
based on the US treasury’s unilateral reinterpretation of the existing tax code
without new legislation (has been a prior sticking point and unlikely before mid-
2015) and were largely expected based on recent commentary from US treasury
secretary Jack Lew. Overall, we view the proposed rules as unlikely to prevent
completion of Abbvie’s acquisition of Shire (No Rating) but see them as potentially
further deterring a tax-inversion driven renewed bid for AZN (Neutral) by PFE post
its Nov 26th ban on making a new offer under the UK takeover code (although would
not preclude an
* Unlikely to impact Shire deal completion
Although they directly target the provisions likely to be used by Abbvie to extract tax
benefits from the Shire deal, we see the proposed rule changes as unlikely to
prevent completion of the Abbvie/ Shire merger since: 1) We believe that the new
treasury rules are likely subject to legal challenge by inverted companies to test if
they over-stretch the treasury's legal authority, a process likely to take several
years; 2) We highlight there are no specific tax inversion legislation conditions in the
acquisition agreement; 3) Abbvie has stated that tax is not the primary for the Shire
deal and that it has “excellent strategic fit” and “compelling financial rationale well
beyond the tax impact”; 4) We estimate the estimated £13/share tax inversion
benefit was already heavily risk-adjusted in the deal price given our base case valn
of £46 plus £6 upside from meeting Shire’s long-range plan and £5-9 of synergies
could justify the initial c£53 offer price without assuming tax benefits.
* Downside fair value is £46-£52 per share if Shire deal breaks
In the event the deal falls through, however, we highlight our base-case fair value of
£46 per share, or £52 assuming that the Shire long range plan is met, and that +ve
newsflow (Vyvanse litigation, 2Q EPS beat) occurred since the initial deal (ie wasn’t
reflected in the prior undisturbed share price).
* Rule changes a pot’l addn’l deterrent to PFE returning for AZN
For AZN, we view the rule change as reducing further the likelihood that PFE
returns with a new tax inversion driven bid post its 26 November block on making a
new offer under the UK takeover code (although would not affect any potential allcash
offer). Specifically, we would expect the rule changes to increase the risk
adjustment that PFE would need to apply to tax benefits in a renewed offer relative
to its last rejected proposal at £55 per share. When combined with a significant
increase in perception of AZN pipeline value through recent clinical data (eg AZN’s
PDL1 and 9291 at ASCO), the bid-ask spread only appears to be getting wider in
our view. See here for more details on our views on PFE/AZN.