Yesterday’s inversion buyers become tomorrow’s M&A targets
Backlash against companies considering inversions nixes plans.
With a record number of U.S. tax-inversion deals shrinking the pool of possible targets, the next crop of acquirers may pursue their former American peers that have already reincorporated abroad.
While the Treasury Department is taking heed of President Obama’s call to stop “corporate deserters” and weighing ways to deter companies from making overseas acquisitions for tax advantages, tax expert Robert Willens says it may only lead buyers to accelerate their plans. U.S. firms that have moved their legal addresses abroad present another option, according to Jefferies Group, after about 20 deals since 2010 reduced the number of large, native European and Canadian candidates.
“You’re going to hear a lot of saber rattling on this issue, but it’s going to be hard to do anything at least before November, even from an executive level,” said Kevin Kedra, a Rye, N.Y.-based analyst at Gabelli & Co. “These deals still make sense,” he said. “There are a lot of quality companies out there that have done an inversion that could now be targets themselves.”
Generic drugmakers Perrigo and Actavis alone have added a combined $44 billion in market capitalization since announcing they were reincorporating abroad. The gains would make it easier for a larger rival to acquire them and meet the threshold for inversions that typically requires the foreign company’s investors to end up with at least 20 percent of the combined firm. Once Salix Pharmaceuticals closes its deal with Cosmo Pharmaceuticals and moves its mailbox to Ireland, it too could top the target list, said Canaccord Genuity.
The Treasury said earlier this month that it’s examining whether it has the authority to act on its own to curb inversions and bypass Congress, which is unlikely to act in the near term, according to analysts, including Charles Rhyee of Cowen Group. Obama and the Treasury probably lack the power to do anything as substantive as what Congress could to prevent these deals, said William Dantzler, a tax partner at White & Case.
The rule that allows an inversion “is in the statute plain as day,” Dantzler wrote in an email. “Only Congress could change that.”
While news of the Treasury’s potential moves pressured stocks of inversion-related companies, the best the Obama administration could do is temper some of the financial benefits of such a deal — which isn’t a straightforward process and probably won’t be retroactive, said Willens, founder of tax and accounting firm Robert Willens.
Even so, “don’t take your time on these if you don’t want to be caught holding the bag,” Willens said.
Finding something to buy may not be as easy as it once was. Since Valeant Pharmaceuticals International kicked off the recent inversion frenzy with its 2010 purchase of Canada’s Biovail, targets from Irish drugmakers Elan to Shire have been gobbled up.
There is an increasing scarcity “of companies to invert, at least sizable companies,” said David Steinberg, a San Francisco-based analyst at Jefferies. “There are still some European-based companies that are current stand-alones, which have not been inverted that could be. But a lot of the targets now are effectively U.S. companies who are domiciled in Ireland, like Perrigo.”
Perrigo, which moved its legal address to Ireland last year with its purchase of Elan, is attractive because of its dominant store-brand business model and strong cash flow, Steinberg said. Abbott Laboratories, Bristol-Myers Squibb and Eli Lilly are among logical suitors, as they don’t compete with Perrigo’s over-the-counter store labels, he said.
“As it relates to inversion, if that ever did come about, it would be a secondary benefit, not the primary driver of us taking any type of M&A action,” said Edward Sagebiel, a representative for Eli Lilly. Spokesmen for Perrigo and Actavis declined to comment, as did representatives for Abbott and Bristol-Myers.
Actavis, the world’s biggest generic drugmaker, could also lure inversion interest from large pharmaceutical companies, said Kedra, of Gabelli. Actavis gained an Irish domicile when it acquired Warner Chilcott in 2013. The $54 billion company bought Forest Laboratories this year to expand in brand-name drugs, bolstering its appeal for some buyers, Kedra said.
Most companies that have ditched their U.S. addresses in the past four years have gotten bigger. The collective market value of those firms has increased by $129 billion since the inversions were announced, data compiled by Bloomberg show.
“They can be a target for a very large company since they’ve gotten pretty large themselves,” said Willens, the tax expert. “It definitely feeds on itself.”
U.S. companies also would have more options if they explored a spinversion, a type of inversion in which a conglomerate would spin off a portion of its business and reincorporate that piece by combining it with an overseas entity. Kimberly-Clark, the $40 billion maker of Kleenex tissues that’s already spinning off a health-care unit, would be a candidate for such a transaction, said Ed Outslay, an accounting professor at Michigan State University.
A representative for Kimberly-Clark declined to comment.
Smaller deals may be easier to carry out amid growing backlash, said Kedra, of Gabelli, a unit of Gamco Investors. Companies such as Actavis are still appealing inversion targets for large buyers, though possible suitors including Pfizer will now have to wrangle with an even bigger political spotlight, he said.
Walgreen backs off
The potential backlash was too much for Walgreen, which said it won’t use its deal with Alliance Boots to move to Switzerland. The drugstore company is still planning to buy the 55 percent of Boots that it doesn’t already own.
“The window is starting to close, and with Obama’s movement, I think that’s accelerating the closure of that window,” said Damien Conover, a Chicago-based analyst at Morningstar.
Because Walgreen is a well-known consumer name, it was probably more sensitive to political criticism. The drugstore’s decision to not pursue an inversion may actually be a positive for companies that are already in the middle of their own deals or considering one, said Michael Yee a San Francisco-based analyst at RBC Capital Markets, a unit of Royal Bank of Canada.
“It didn’t shake the boat even more with a major American company doing it,” he said by phone.
U.S. companies with an inversion deal in mind that makes sense still should act fast, said Dantzler of White & Case.
They would be “well-advised to accomplish it as quickly as possible,” he said.