Shire deal hinges on Baxalta tax status
Shire’s potential $32bn takeover of Baxalta is dependent on whether the UK-listed drugmaker can pay for a large part of the deal in cash without triggering a big tax bill, say people close to the talks.
Negotiations have been progressing, the people said, but Shire is still seeking assurances that the tax-free status of Baxalta’s spin-off last year from Baxter, the US medical group, would not be jeopardised by a cash payment.
An initial Shire bid rejected by Baxalta in August was comprised entirely of shares to avoid violating US rules that forbid spin-offs being used to funnel cash to shareholders tax-free.
Shire has since been persuaded that it would be possible to add cash to its all-share offer without creating a tax liability — but it is still working with advisers to secure a firm legal opinion on the matter before pressing ahead.
Two people close to the situation said Shire was willing to pay between $46.50 and $48 per share for Baxalta, with up to 40 per cent of this bid in cash. An offer in the middle of that range would represent a premium of 43 per cent to Baxalta’s share price before Shire’s approach was made public in August.
A deal could come within days if the tax obstacle is overcome — but the talks may drag on or break down altogether, people close to the matter warned.
In documents filed with regulators last year, Baxter warned of a “significant liability” if the Baxalta spin-off was deemed to be taxable and said the new spin-off company would be barred from entering into transactions, such as a takeover, that put its tax-free status at risk — “except in certain circumstances”.
Baxter, which still owns a fifth of Baxalta, secured an indemnity from the spun-off company against any tax costs arising from such a deal, and this potential liability would be inherited by Shire in the event of an acquisition. People close to the matter said Shire would not proceed unless “highly confident” of its tax advice.
Maintaining the tax benefits of the spin-off are crucial to the economics of Shire’s proposal, with the Dublin-based company promising further gains from the absorption of Baxalta’s business into its low-tax Irish domicile.
Shire has said Baxalta’s tax rate would fall from a projected 23 per cent in 2016 as a standalone company to 16-17 per cent following the proposed deal.
Flemming Ornskov, Shire chief executive, insists his main motivation for the takeover is strategic, as it would potentially create the world’s biggest specialist producer of treatments for rare diseases, with the power to generate annual revenues of $20bn by 2020.
He has defied initial resistance from Baxalta and scepticism from shareholders to keep pushing for what would be by far the biggest deal in Shire’s 30-year history.
If successful, a deal would put the combined group on the cusp of the world’s 20 biggest pharma groups by sales and reduce Shire’s longstanding dependence on selling treatments for attention deficit hyperactivity disorder.
However, some investors have told the Financial Times that they remain wary of the deal as it could expose Shire to looming competitive threats in Baxalta’s core haematology business. They say a cash-and-share offer of up to $48 per share would represent a hefty increase on the $45.23 all-share proposal in August because the value of the dollar has since risen against the pound while Shire’s share price has fallen by over a quarter — in part because of a broader decline in biotech stocks but also reflecting scepticism over the Baxalta pursuit.
People close to Shire say Mr Ornskov has been engaging intensively with shareholders to convince them of the deal’s merits and that many long-term investors have been won over.
Baxalta’s shares traded at $41.06 on Wednesday afternoon, down 1 per cent. Shire’s closed down 2 per cent at £44.41.