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AbbVie to buy Shire for $54.8 billion to lower taxes

First Published      Last Updated Jul 18 2014 03:08 pm

AbbVie agreed to buy Shire Plc for $54.8 billion, becoming the largest U.S. company to ever take a foreign address to lower its taxes.

The price is 53 percent above Shire's closing level on May 2, before AbbVie made its first takeover proposal, the companies said in a statement Friday.

AbbVie becomes the latest U.S. health company to move abroad amid a record period of pharmaceutical deals. The agreement will move North Chicago, Ill.-based AbbVie's tax residence, though not its operations, to the U.K. in a so-called tax inversion, dropping its tax rate in 2016 to 13 percent from 22 percent. Shire's drugs for attention deficit hyperactivity disorder and rare diseases will diversify AbbVie's portfolio, dominated by the rheumatoid arthritis medicine Humira.

Analysts asked if the deal was done primarily for tax reasons. "This is a transaction that we believe has excellent strategic fit, well beyond the tax impact," AbbVie Chief Executive Officer Richard Gonzalez said on a conference call discussing the deal. "We wouldn't be doing it if it was just for the tax impact."

The deal caps AbbVie's 2½-month pursuit of Shire, which rejected four earlier proposals.

Pfizer's $117 billion failed bid this year for London- based AstraZeneca kicked off a surge of acquisition activity among companies seeking lower taxes. Not including the AbbVie offer, there were deals proposed or completed worth $264 billion in the second quarter, according to data compiled by Bloomberg, five times more than any quarter since at least 2009.

"It's very, very sweet for Shire," said Guillaume van Renterghem, an analyst at UBS in London. "The beauty of this AbbVie-Shire deal is that everybody gets out of this deal in even better shape than they entered it."

AbbVie was split off from Abbott Laboratories in January of last year, creating a brand-drug company out of the larger healthcare conglomerate that's now focused on medical devices and nutrition products.

Abbott was involved in a tax inversion this month as well, selling part of its off-patent drugs business to Mylan, allowing the generic drugmaker to shift its legal address abroad.

Negotiating teams from both companies met Thursday at the law offices of Davis Polk & Wardwell in New York to finalize terms and announce a deal, said a person with knowledge of the matter who asked not to be identified discussing private information.

Shire's board said July 14 it would be willing to back AbbVie's latest offer, and that negotiations were about issues other than price.

The combined company will have 15 drugs in the last of three stages of testing typically required before U.S. approval, Gonzalez said.

The U.S. government has been scrutinizing tax inversions, and Sen. Ron Wyden, a Democrat from Oregon, is proposing a bill that would make them more difficult to do. In the negotiations, Shire sought protection in case the U.S. passes a law that undercuts AbbVie's tax benefits and puts the deal's closing at risk, said two people with knowledge of the matter.

Gonzalez said the U.S.'s high corporate tax rate of 35 percent was pushing companies abroad. "Companies like ours need access to our global cash flows," he said on the conference call. "Today we're at a disadvantage compared to our foreign competitors, and that's the debate we should be having around inversions and out tax code."

U.S. government action or legislation to stop tax inversions by companies probably wouldn't halt the deal, he said. "We've looked carefully at that aspect and we believe its executable."

Since January 2012, at least 20 U.S.-registered companies have announced or attempted deals to shift their legal addresses overseas and lower their tax rates, according to data compiled by Bloomberg.

The agreement calls for AbbVie to pay Shire a breakup fee of 3 percent of the deal's value, or about $1.6 billion, or reimburse costs of not less than $500 million, if the purchase fails to go through, according to the statement.

Gonzalez and his executive team won't move out of the U.S. While Shire is based in Dublin for tax purposes, its main executive offices are in Basingstoke, England, and Chief Executive Officer Flemming Ornskov works in Lexington, Mass. AbbVie has said the combined company's tax domicile will be in the U.K.

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