US Treasury takes action on tax inversions

Treasury Secretary Jack Lew
Treasury Secretary Jack Lew

The US Department of Treasury issued a report Monday in which it announced a number of measures to de-incentivize companies from performing so-called tax inversions, essentially acquiring an overseas company and redomiciling abroad to save millions of dollars on taxes. Monday's actions are largely being called a piecemeal effort to stop these inversions, but at the same time the measures have created uncertainty around some of the industry's recent deals.

The most recent of these is Raleigh, NC-based Salix's proposed merger with Italian drugmaker Cosmo Pharmaceuticals, announced this past July. The newly combined company plans to move its headquarters to Ireland for tax purposes.

Salix's top investors, according to Reuters, have threatened to vote against the deal, arguing that the inversion with Cosmo would make it more difficult to find a suitor to buy the company. Allergan is reportedly in talks to acquire Salix in an attempt to hold off a takeover bid from Valeant, Bloomberg reported Tuesday, and an agreement with Allergan could put the brakes on the deal.

The Treasury stated it would enact “first steps” to reduce the tax benefits of these deals by eliminating certain techniques from the corporate repertoire. ISI analyst Terry Haines wrote in an analyst note early Tuesday morning that yesterday's actions targeted the following measures: “hopscotch” loans (which let companies access foreign cash without paying US taxes), the restructuring of a company's foreign subsidiary to gain tax-free treatment, preventing an inverted company from transferring cash or property to avoid US taxation, and also strengthening the requirement that the former owners of the US entity own less than 80% of the newly combined company.

The Treasury wrote that it will look for more ways to reduce such tax benefits, “including additional regulatory guidance as well as reviewing our tax treaties and other international comments.” Monday's actions will not apply retroactively, but would be enforced on any deals made from Monday forward.

Analysts weighing in on the Administration's latest tax moves say the steps weaken the economic impetus for firms, without blocking them altogether. For instance, Sanford Bernstein analyst Tim Anderson labeled Treasury's actions merely “incomplete stop-gap measures” that could impact what buyers are willing to pay for inversion targets. Citing Pfizer, which attempted a trans-Atlantic takeover of British company AstraZeneca to gain a lower tax rate, Anderson said AZ's share price decline today implies “the market assumes that there is still a partial chance that PFE and AZN merge, which is our view as well.”

Pfizer, Anderson wrote, likely anticipated any regulatory action in its thinking when it pursued AZ, and, thus the Treasury's actions are unlikely to play a major factor in whether it renews efforts to go after Actavis or another drugmaker for inversion purposes moving forward.

“We surmise that Pfizer still remains interested in inversions,” he noted, but the timing of a potential deal “could be delayed as the impact of the new regulations are contemplated.”

Pfizer stated it would no longer pursue AstraZeneca this past May after making an offer of $120 billion, which the British drugmaker declined. Analysts at the time noted, though, that Pfizer would have another opportunity to make a bid in the coming six months.

Weighing in on another inversion-inspired deal, ISI analyst Mark Schoenebaum wrote that it's unlikely Treasury's measures will affect the AbbVie/Shire deal, as each side would have to pay a hefty break-up free if AbbVie shareholders choose to quash the deal for any reason, tax included. In that case, the $500 million break-up fee would jump to $1.5 billion.

AbbVie acquired Shire for $54 billion this past July.