AbbVie Inc. (ABBV) announced that it is reconsidering its planned acquisition of Shire (SHPG), which was set to complete by year end. AbbVie has notified Shire that its board of directors will be meeting to consider whether it would withdraw or modify its Jul 18, 2014 recommendation to its stockholders to approve the merger agreement.
AbbVie stated that its board of directors would meet on Oct 20, 2014 and discuss the impact of the U.S. Department of Treasury’s proposed unilateral changes to the tax regulations announced last month.
If AbbVie goes back on its recommendation and subsequently terminates the deal, the company will be obligated to make a break-fee payment equal to 3% of the total deal value (approximately $1.6 billion). Meanwhile, if AbbVie’s shareholders vote against the takeover, the company will pay Shire at least $500 million (up to 1% of the deal value) to compensate for costs, losses and expenses related to the deal.
The Acquisition Deal
AbbVie had agreed to acquire Shire for approximately £53.19 per Shire share (£24.44 in cash and 0.8960 ordinary shares of the merged company for each Shire share). The deal is valued at approximately £32 billion.
If the deal goes through, Shire shareholders will have approximately 25% ownership in the post-merger entity, with AbbVie retaining the rest.
Our Take
Although AbbVie was not acquiring Shire solely for tax reduction purposes, it was a major incentive behind the deal. The deal would have reduced AbbVie’s effective tax rate to approximately 13% by 2016 from the current effective tax rate in the early twenties.
Other benefits to be derived from the Shire acquisition include the addition of multi-million dollar generating products to AbbVie’s portfolio including rare disease drugs. It would also reduce the company’s dependence on Humira. Humira accounted for approximately 57% of AbbVie’s total revenues in 2013. Humira is set to go off-patent in the U.S. in Dec 2016 and the EU in Apr 2018.
We believe that if AbbVie chooses to terminate the agreement, it would have a detrimental impact on Shire’s share price.
AbbVie carries a Zacks Rank #3 (Hold) while Shire holds a Zacks Rank #1 (Strong Buy). Ligand Pharmaceuticals Inc. (LGND) and Medivation Inc. (MDVN) are two other well-ranked stocks in the health care sector holding the same Zacks Rank as Shire.
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